What Will the Yield Curve Look Like if the Fed Hikes in Dec and March?

Futures positions imply a 92% chance the Fed will hike in Dec and 50% again in March. How will the yield curve respond?

Let's start with a discussion of how the short-end of the yield curve will act.

The following chart shows that when the yield on 3-month treasuries jumps above the Fed Funds rate, a rate hike is imminent.

CME futures suggest a 92% chance in December and just over 50% in March.

If the Fed does get in two rate hikes, what would the yield curve look like?

I suggest something like the following.

3-Month to 10-Year US Treasury Yield Projection

My base assumption is consumer price inflation is not about to jump significantly higher, and if not, there will be downward pressure on long-term yields.

The short-end of the curve is easier to predict. Add 50 basis points of hikes, then subtract about 5-10 basis points corresponding to the patterns in the first chart.

Inversion Chances

The blue oval represents an area in which we may see a yield curve inversion (longer-dated treasuries yield less than shorter-dated treasuries).

Should that occur, it will be a strong recession warning.

An inverted curve does not guarantee a recession, however, nor does lack of inversion mean a recession will not happen.

Regardless, we are very close to the end of this rate hike cycle.

Mike "Mish" Shedlock

Comments
No. 1-12
Roadrunner12
Roadrunner12

The 2 yr and 10 yr treasury spread watch is definitely on. Will be definitely interesting watching the spread over the next few weeks as the quarter point raise in two weeks looks to be a go. Do inverted yield curves provide a good correlation of impending recessions? https://www.cnbc.com/2017/11/28/this-potential-signal-should-cause-investors-to-head-for-the-exits.html

Greggg
Greggg

I've been expecting them for darn near 3 years and it ain't come yet.

Greggg
Greggg
  1. sustained stock market decline
Greggg
Greggg
  1. recession
Tod_E_Tosser
Tod_E_Tosser

Mish: I believe you're misreading the chart. The Fed Funds implied probability of a December hike is 100%, broken down to about 92% chance of 25 bps, and 8% chance of 50 bps.

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