Has Treasury Market Misjudged Timing for Peak Rates Again?
For much of the year, the bond market has been embracing expectations that the Federal Reserve’s interest rate increases have peaked or were about to peak. The underlying logic centered on the ongoing slide in inflation following 2022’s spike.
Inflation has continued to ease, but the market has continually discovered that the future’s still uncertain as the Fed pushed ahead with more hikes.
The ”wisdom” of the crowd may be in the early stages of another reality check as the Treasury market flirts with repricing yields upward. It’s too soon to say if the latest uptick is noise or the start of a trend that marks a new run of higher yields that takes out previous highs.
Even if the point of peak rates has finally arrived, the question turns to: How long the accumulated rate hikes hold? For longer than expected, predicts Neel Kashkari, president of the Minneapolis Fed and a voting member of the central bank committee that sets monetary policy. “I think we’re a long way away from cutting rates,” he advises.
Meanwhile, the Treasury market is repricing yields higher again. Notably, the benchmark 10-year rate is pushing up against the high for the year. Using a set of exponential moving averages for this key rate suggests the bias is shifting to the upside once more.
A similar profile applies to the policy-sensitive 2-year yield, which is trading just below its 2023 high.
Keep in mind that the 2-year yield (widely followed as the market’s main guesstimate for where the Fed’s target rate is headed) has been forecasting the central bank’s rate hikes have passed and/or rate cuts are near. The scorecard so far: the Treasury market has been consistently wrong.
Relative to inflation and unemployment, the current Fed funds rate (5.25%
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