The 10 year Treasury yield spiked to 1.86% today as new assumptions for the Fed are being “priced in”. The 2 year Treasury (most sensitive to Fed moves) has jumped to a 2 year high of 1.00% (up 80 bps since September). The early January predictions of 3 or 4 rate hikes this year now seem “dovish” this week.
Major factors include continuing high CPI numbers combined with:
- Predictions of extended supply chain disruptions resulting in shortages/higher prices for oil, raw materials, computer chips, consumer staples, etc; and
- A very tight labor market with “sidelined” workers that will demand higher wages to return to work.
Markets are now pricing in a 0.50% rate hike in March (the first 0.50% rate hike since May 2000). Consumers, businesses and Congress are clamoring for action on inflation. It looks like the Fed will want to make a “whatever it takes” statement with a rare “double hike” in March (as soon as the monthly bond buying has ended). Fed governors are calling for as many as 5 rate increases in 2022. Also, the 10 year T is spiking on the “relative value trade” as the 10 year German Bund is climbing out of negative territory for the first time since May 2019. So the 10 year at 1.86% is now right where it was on 12/31/2019, the day of the first Covid alerts and before the unprecedented fiscal and monetary stimulus of the past two years. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
