After Federal Reserve Chair Jerome Powell’s remarks this morning, the market is pricing in an 86% chance of a 75-basis-point hike later this month.
Meanwhile, rates continue to accelerate at the short end of the curve. That’s been the story for months now.
But will the middle and long end of the curve head higher as well?
According to the two-year US Treasury yield, the answer is a resounding "yes!"
Short-duration rates offer plenty of valuable, leading information regarding US Treasury yields.
We’ve leaned on the five-year yield throughout the current cycle as an early indication of the direction of the 10- and 30-year. It’s proved a beneficial practice.
Today, we’re going to drop it down a notch, extending the same logic to the two-year yield.
Here’s a quad-pane chart of the two-, five-, 10-, and 30-year US Treasury yields:
Starting in the upper-left corner, the two-year is well above its former 2018 highs and hitting levels not seen since November 2007.
The rest of the pack has also reclaimed their prior cycle highs marked by the 2018 peaks. But year-to-date highs remain a hurdle.
If the two-year is any indication, those former highs only represent a temporary obstacle.
But there’s more evidence overseas hinting that rates are on the rise across the curve.
If the bond market is flashing "sell" signals, we’re making the bet that rates will continue to climb.
As long as this is the case, we want to position ourselves in areas of the market that reap the most reward from rising rates, such as materials, energy, and financials.
Stay tuned as we continue to monitor the short end of the curve for additional clues.
Countdown to FOMC
Following Powell's most recent comments, the market is pricing in a 75-basis-point hike later this month.
Here are the target rate probabilities based on fed funds futures:
