The long-end of the bond market may have done the final round of hiking for the Fed.
There is a pre-occupation about short-term rates in financial markets because the relationships between short-and-long rates are generally stable (or at least don’t move quickly). But that’s not always the case as the past two months proved.
US 10-year yields have risen to 4.72% from 4.00% at the start of August.
Is that the equivalent of 75 bps more of hiking?
If anything, it’s more.
The market talks about short-term rates and the Fed constantly, but most borrowing is done based on 5-10 year rates. The rise in both is a material change in credit cost and availability. I means that the Fed needn’t do as much and we’re increasingly seeing that in Fed fund futures.
The market is now pricing in just a 22% chance of a hike in November and 37% this year. In addition, the market sees the higher long-end rates biting into demand harder next year with 75 bps of cuts priced in, up from 59 bps earlier this week.
WSJ Fedwatcher Nick Timiraos hinted at that today on CNBC, saying that the Fed won’t be happy at the speed in the rise in longer-term rates. That should make them more cautious and likely to wait, at least on November 1.
The problem for them is that while they can hold the Fed funds rate static, they can’t control the long end. Rates can fall as quickly as they have risen and the Fed could worry that would put them back behind the curve.
This article was written by Adam Button at www.forexlive.com. Source