Westpac: How Far From Peaking Are Front End Rates?

Westpac note that in prior hiking cycles “2-Year swap rates have tended to be within 0-50bp of their peak at the time of the first hike (1999, 2009 cycles) and those peaks occurred within 2 months of the start of the cycle. We think that is likely to be the case in this cycle as well, especially as the size and pace of the new cycle will be broadly similar to the path followed on those occasions. We will, of course, be wrong if the cycle needs to be larger than we expect, however even that scenario is offset to some degree by current policy pricing. We think the inflation backdrop negates the message from 2002, in which 2-Year swaps peaked on the day of the first hike. Stepping out along the term structure, the U.S. backdrop remains absolutely crucial to assessing domestic directional outcomes. So an understanding of how 10-Year yields have behaved since the Fed began the current cycle is potentially instructive. There have been a few hike cycles in which yields have risen at the pace of recent moves. However, it is only the 1994 cycle where the upswing was materially extended. That should lower the odds of a material extension to the current bearish momentum, although we would caution that from an inflation expectations perspective it is the 1994-1995 cycle that has the most comparisons with the current period.”