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What Will the Yield Curve Look Like One Year From Now?

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7 comments on What Will the Yield Curve Look Like One Year From Now?

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The three-year yield is currently 0.97%. It has effectively priced in three rate hikes in 2022. 

The Fed and the market have penciled in three additional hikes for 2023. Meanwhile, the yield on longer duration treasuries has been headed the opposite way.

If we assume the Fed gets in three hikes with three more still priced in and the bond market behaves like it is now, you get the following bizarre curve.

Hypothetical Yield Curve 2022-12-23 

That is not a prediction. It’s a what if that depends on three things.

  1. Three hikes in 2022
  2. Three more hikes still penciled in for 2023
  3. The bond market acts pretty much like it does now

I do not think we see that curve. And I still do not think the Fed gets in three hikes. But even if the Fed does, it’s even more unlikely there will be three further hikes before the Fed gets accused of breaking something. 

In short, I expect inversions if the Fed hikes thrice and probably sooner, even if the Fed attempts to micro-manage the curve to meet its expectations. 

The Fed Expects 6 Rate Hikes By End of 2023 – I Don’t and You Shouldn’t Either

I discuss projections in The Fed Expects 6 Rate Hikes By End of 2023 – I Don’t and You Shouldn’t Either

But the fact remains There is No Predictive Power in Fed Projections

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Mike Shedlock

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Scooot
Scooot
2 years ago
I’ll play. My guess is:
Fed funds 0.75%
3 year 1.75%
10 year 2.25%
30 year 2.75%
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CNNfakeNews
CNNfakeNews
2 years ago
Why wouldn’t the government want our economy to collapse? They can usher is socialism much faster that way. Once all the oligarchs sell all of their stocks before the market collapses, of course. Do you miss Trump yet?
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Mackkenzie
Mackkenzie
2 years ago
There won’t be any rate hikes. The very existence of the flattened yield curve indicates there are economic problems brewing which will be all too obvious by March (i.e. the earliest time a rate hike could occur). Bond yields will fall across all durations as the global economic slowdown becomes obvious. Short term treasuries will see the biggest fall in yields as short term inflation becomes a non-issue, thereby returning the yield curve to a more normal form.
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FromBrussels
FromBrussels
2 years ago
Reply to  Mackkenzie
….if the US$ keeps its reserve currency status….and that’s the big question… the way geo economic politics are evolving I wouldn t bet my fn a** on it    
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Mackkenzie
Mackkenzie
2 years ago
Reply to  FromBrussels
Well, the long bond is clearly showing there is little belief in an inflationary scenario, and believes economic circumstances are getting worse. There is a long history of the long bond being prescient in showing the direction of the economy and interest rates. Jeff Snider has done a lot of work to demonstrate the primacy of the long bond in forecasting the economy.
Ironically, Jeff has also shown that the root economic crisis around the world is due to a shortage of dollars since the Euro dollar system has come off the rails. The dollar will get MUCH stronger before anything happens to derail is as the global reserve currency (which is actually NOT a good thing, since it will strengthen due to acute global economic pain as opposed to any productive growth).
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Scooot
Scooot
2 years ago
Reply to  Mackkenzie
“Well, the long bond is clearly showing there is little belief in an inflationary scenario, and believes economic circumstances are getting worse.”
I agree with this, I think there’s a belief that inflation itself will contribute to a stalling economy and it will then decline because of it.
However Treasuries and the Bond Market in general isn’t truly floating at the moment so comparisons with history might not hold. 
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caradoc-again
caradoc-again
2 years ago
Too many moving parts and China will influence too.
A subtle move to Chinese locally sourcing consumer goods hitting some US EPS and growth, slowing Chinese growth, reduction in US stimulus, consumers pockets picked by inflation, possible China exporting deflation via weaker Yuan, stronger $ hitting Emerging markets, lack of investment in conventional energy infrastructure.
All smacks of stagflation bordering on deflation.
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