To paraphrase Chubby Checker, “How High Will It Go?” That is, how high will the 10 year Treasury yield rise and how high will 30 year mortgage rates rise as well?
(Bloomberg) — One of the hottest debates in financial markets right now is how high the yield on 10-year Treasuries can go, with the median forecast of analysts compiled by Bloomberg seeing 3 percent by year’s end. If history is any guide, it probably won’t rise much further than that. In the past five major Fed tightening cycles, longer-term Treasuries outperformed short-dated debt, flattening the yield curve, as investors likely envisaged higher rates would stem inflation and keep economic growth from overheating.
I have included the NBER’s Recession Indicator to show that the 10Y-2Y curve flattens as we approach a recession. But are we approaching a recession OR improving?
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The US Treasury 10Y Term Premium remains negative (although increasing).
And with 30Y fixed-rate mortgages at 150-180 basis points over the 10Y Treasury Note yield (depending on which benchmark rate you use), this implies that mortgage rates will peak at 4.50-4.80% if the 10Y Treasury yield peaks at 3%.
Yesterday, James Bullard from the St Louis Fed said that everything will have to be perfect to enable four Fed rate hikes this year. With The Fed Funds Target Rate (Upper Bound) currently at 1.5%, 4 rate hikes at 25 basis points each would put the target rate at 2.5%.
Well, the implied probability from Fed Funds Futures indicate that four rate hikes are a low probability. Rate hikes to 2% are more likely.
The Fed has already done the Limbo Rock with rates and are finding people getting severe backaches from raising the bar.
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