Treasury Yields Reach Highest in a Decade

  • The May CPI Report continues to reverberate around the world, and in its wake are Treasury yields not seen in over a decade.


  • Investors are betting the Fed will either not be able to contain inflation anytime soon, or that if they do it will necessitate a hard economic landing in the form of a recession.


  • The 10-yr yield is currently 3.27%, a new cycle high eclipsing the 3.21% touched briefly in May, and it’s also the highest 10yr yield since May 2011.


  • The 2yr yield is up to  3.19%, a new cycle high and the highest yield since December 2007. The 5yr now yields 3.38%, the highest since August 2008.


  • The futures market is now pricing in 175bps of rate hikes between now and September. That implies that one of the next three meetings will feature a 75bps hike. There has been some chatter that Wednesday’s FOMC meeting may surprise with a 75bps hike. We don’t think so as the Powell Fed likes to prep the market pretty extensively prior to policy moves. While St. Louis Fed President James Bullard contemplated a 75bps hike a couple months ago he walked that sentiment back in recent weeks.


  • There is still plenty of opportunity in July and September to hike by 75bps and it would give the Fed time to begin prepping the market for that as early as this Wednesday’s meeting. A 75bps rate hike hasn’t been employed since 1994 so if its done soon it will imply the Fed is very much feeling behind the curve.


  • The futures market is also pricing in a 3.34% rate after the December FOMC meeting, and 3.57% by the February 2023 meeting. It’s these higher implied fed funds rates that have global financial markets in a near panic as equities are selling off hard on the prospect of a coming recession and Treasury yields reach multi-year highs on the prospect that inflation will remain an intractable foe.


  • The Wednesday FOMC meeting will give Powell the first and best opportunity to communicate the Fed’s view on inflation and the coming policy actions. We think he will put a 75bps hike on the table for July. It will also be of interest to see where the Fed’s refreshed dot plots have policy rates peaking. The March dot plot had the median rising to 2.75% in 2023 and 2024 with longer-term rate settling at 2.375%. All those levels look to be repriced significantly higher on Wednesday.


  • Tighten the old seat belt as this week has all the earmarks of one that will be remembered for some time to come.


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.34 3.53 3.61 3.74 3.87 4.34
0.50 3.33 3.50 3.55 3.63 3.73 4.23
1.00 3.32 3.47 3.51 3.58 3.64 4.10
2.00 3.46 3.46 3.51 3.52 NA
3.00 3.46 3.46 NA
4.00 3.42 NA
5.00 3.38 NA
10.00 NA

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Published: 06/14/22 Author: Thomas R. Fitzgerald