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MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
US TSYS
With the Federal Reserve having lifted the funds rate above the prevailing inflation rate, the next question is how much higher will the funds rate go? 2-Year U.S. Treasuries suggest not much higher.
- Fed-dated OIS has moved terminal rate pricing to 5.20% for July, up 35bp month to date and 10bp above the Fed’s December forecasts.
- An alternative market estimate, however, is less hawkish. The cycle high in the 2-year U.S. Treasury yield has historically tended to correctly predict the terminal rate with a lead time of 5 months.
- A 4.80% peak in the 2-year in November suggests a terminal rate slightly less than 25bp above the current funds rate at the March FOMC meeting.
- While the recent rise in the 2-year yield would appear at be odds with this signal, history suggests a re-test of the yield high, even a small push higher, would be typical in the run-up to the last hike, particularly if accompanied by swings in core inflation.
- With core PCE prices y/y in a disinflationary trend since Sep-22, the 2-year yield peak signal is worth keeping in mind when thinking about the funds rate outlook.
Fig. 1: Fed Funds Rate Vs. U.S. Treasury 2-Year Yield
Source: MNI – Market News/ BloombergWhy MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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