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Bond Yields Surge to Start 2022, What’s Ahead?

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17 comments on Bond Yields Surge to Start 2022, What’s Ahead?

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Bond Yields 1:00 PM Central 

  • 3-Month: 0.63% + 0.01 PP
  • 6-Month: 0.21% +0.02
  • 1-Year: 0.39% +0.01 PP
  • 2-Year: 0.78% +0.05 PP
  • 3-Year: 1.02% +0.07 PP
  • 5-Year: 1.36% +0.11 PP 
  • 7-Year: 1.56% +0.13 PP
  • 10-Year: 1.63% + 0.13 PP
  • 30-Year: 2.02% +0.13 PP

That represents significant one-day steepening of the curve. But there is still no expectation of a rate hike at the March 16 FOMC meeting.

The Rate Hike Odds Charts are from CME Fedwatch. They are based on Fed Fund Futures trading. 

May 4 Rate Hike Odds

Market participants believe May 4 is when the first hike will occur and the probabilities for June and later are skewed to the upside. 

June 15 Rate Hike Odds

Market participants have penciled in a second consecutive rate hike for June with a combined net chance of under two hikes rated only 44.9%. 

September 21 Rate Hike Odds

At the September meeting, the market does not quite forecast the third hike but the skew is heavily to the upside.

There is also a meeting on November 2 but let’s skip to the end of the year forecast. 

December 14 Rate Hike Odds

I find the prospect of 7 rate hikes in 2022 more than a bit amusing.  Here’s a good way of looking at things.

  • 0 to 2 hikes: 33.8%
  • 3 hikes: 30.2% 
  • 4 or more hikes: 36.0%

The median projection is now a bit more than 3 hikes this year. 4 and 2 rate hikes are at nearly equal odds, but 5, 6, an 7 hikes rated a combined 13% vs 0 to 1 hike at a combined 10.8%

The change in rate hike odds today reflect the surge in yields that also happened today.

There is No Predictive Power in Fed Projections

If you think the Fed, Fed Fund futures, or current rates predict anything, you may wish to reconsider.

For discussion, please see There is No Predictive Power in Fed Projections.

I highly doubt the Fed gets in 3 hikes this year but if it does, then look for an inverted yield curve, not further hike projections in 2023.

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Mike Shedlock

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17 Comments
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FromBrussels
FromBrussels
4 years ago
…you can t take away a junkie’s heroin, he might suffer a convulsive seizure …
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KidHorn
KidHorn
4 years ago
The notion that the FED will raise rates to fight inflation is preposterous. They would have to raise rates to the point of complete economic destruction to fight inflation. Companies and individuals won’t slow economic activity because their loan is 3.25% instead of 3%. People won’t decide to save the $1,000 for a new refrigerator because they can get 0.5% savings instead of 0.1% while the refrigerator will cost 5% more in a year.
The markets are entirely based on selling to bigger fools who believe economic nonsense. As long as fools have money, the markets will keep going up. The FEDs primary mission is to ensure the fools have money while pretending otherwise. Not fight inflation.
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Esclaro
Esclaro
4 years ago
The USD surged today crushing everything in its path. Precious metals were annihilated by the prospect of big rate hikes. The market is never wrong! 😝 
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Captain Ahab
Captain Ahab
4 years ago
Once upon a time,
the one-year  interest rate (yield) = real rate (approx the growth rate of real GNP) + inflation rate + risk premium (zero for T=-bonds)
An investor with a modicum of commonsense would logically accept no less. 
The current one-year risk-free rate is 0.39%. When this bubble pops, STAND CLEAR.
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vanderlyn
vanderlyn
4 years ago
i view it differently.   the only job of fed is to keep her owners solvent.   the owners are the money center banks and their cronies.    rates have to go up eventually after 2 decades of zirp like rates.   the owners want biden and status quo to continue.   best to lower the boom now and end the wild free money give away from past 2 years of plague bailouts to everyone from clerks to dishwashers to business ownerrs and major corporations.    i think they’d rather get it over with and give biden a chance at re election over trump in 34 long months from now.    remember the owners of this empire announced the vaccine 2 days after election day 2020.    that was NO coincidence.   trump is a prairie populist demagogue who is hated and despised by the owners of the fed.    i’m sure i am wrong.   i always assume i am.     this is a fun time to be alive.   a great circus.  get your popcorn.  
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KidHorn
KidHorn
4 years ago
Reply to  vanderlyn
There’s no way Biden gets re-elected. He’s too old and clearly going senile. The next dem candidate will likely be from among the woke candidates who were all unelectable in the last election. Except Bernie, who neither party wants as president. That’s why Biden was the nominee. Everyone else had no chance. I don’t think Trump will run and even if he did, I think he would lose the primaries. He won’t come out of nowhere  this time and the republicans will be ready and have a stronger field to contest him. No Ted Cruz or Jeb Bush next time.
I agree about the FED hating Trump. The federal government hated him. The federal government is run by democrats regardless of who the elected officials are. Trump was basically the CEO of a company where the employees despised him.
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Scooot
Scooot
4 years ago
I suspect the Fed wants to normalise rates so they can cut them again when they need to. They’ve spent a long time softly, softly preparing the market for this process so I wouldn’t have thought they’d want to compromise on that by not doing what is expected. Also if they delay hiking in the face of ongoing inflation they’ll have to hike more aggressively later on, whereas if they follow the plan they’ve telegraphed they have more options. 
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Captain Ahab
Captain Ahab
4 years ago
Reply to  Scooot
Either the Fed has no idea what it is doing, or is intent on destroying the economic system.
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TechLover1
TechLover1
4 years ago
Hi Mish,
I see the probability for first rate hike squarely at March meeting from the fedwatch site: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
I do monitor it daily and it has been steady at the March meeting for the first hike for over a week if not longer.
You might have taken the snapshot at a very chaotic moment or you may have skipped March numbers for some reason. BTW, the current May probabilities are same as in your snapshot above but the first rate hike per that site is in March meeting.
Are you using the 25-50 probability to be over 50% to be the cut off point? The way I am calculating the first rate hike probability is to add all the probabilities over the current rate.
I fully agree with the rest of your analysis and I suspect FED will not get the three hikes it wants in 2022.
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Tony Bennett
Tony Bennett
4 years ago
Well, as this site’s biggest bond bull let me say … I LOVE SURGING YIELDS
Accelerating into a brick wall will do wonders for our economy …
Any disruption to the ever rising stock market will only occur when problems arise in credit markets … and rising yields (tightening) in the face of massive leverage??  Once equities fall (hard) that money will be looking for a new home.
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Eddie_T
Eddie_T
4 years ago
Reply to  Tony Bennett
You have become (along with Mish) one of the bond guys I highly respect. I read everything you tweet now.
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Christoball
Christoball
4 years ago
Reply to  Tony Bennett
So how does that play out. When all that money is looking for a new home  the demand and the value of the bond goes up and corresponding rate of return falls,  prompting one to sell their bond for a profitable sale?????
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Eddie_T
Eddie_T
4 years ago
My prediction today.
One hike followed by market chaos, then followed by more FedDoveSpeak. How long can this go on, I have no idea. Been more than a decade.
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Eddie_T
Eddie_T
4 years ago
Reply to  Eddie_T
OT, my energy portfolio is up more than 5% for the year, in the last hour of the first trading day of the year. Pretty good omen.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Eddie_T
“How long can this go on, I have no idea.”
…
Yeah, it has been amazing to watch.  And I have no doubt Powell will turn uber dovish the moment equities fall (probably 2 weeks max before he caved to slumping market), but between world inflation and China property problems spreading put me down for global recession in 2022 (absent another round of massive fiscal stimulus by major economies).
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Eddie_T
Eddie_T
4 years ago
Reply to  Tony Bennett
Glad you made that caveat. It is likely to play in all this, imho.
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TechLover1
TechLover1
4 years ago
Reply to  Eddie_T
I feel this is a bit different this time at lease regarding the first hike.
At this point pretty much everyone is convinced that the FED will hike in March meeting per CME rate futures.
So the real pandemonium will start after second/third rate hike. The first one is kinda baked in the cake now.
I am keeping a close eye on Jan 10 inflation report as well. If it is higher than 7-8%, it may force the hand of Fed to move earlier with the first token rate hike.
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