Breaking News
Get 45% Off 0
Is it finally time to sell Nvidia ahead of earnings?
Read More

Looking Past the Peak of Fed Key Rates

By ING Economic and Financial Analysis (Antoine Bouvet)Market OverviewApr 19, 2023 13:15
ng.investing.com/analysis/looking-past-the-peak-of-fed-key-rates-163959
Looking Past the Peak of Fed Key Rates
By ING Economic and Financial Analysis (Antoine Bouvet)   |  Apr 19, 2023 13:15
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US10Y...
+0.65%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

The US Federal Reserve could soon deliver the last hike of the current cycle. While United States 10-Year yields have seen their peak already, it will need the imminent prospect of rate cuts to re-steepen the curves. We think cuts will come before the year ends, but the Fed is still pushing a higher-for-longer narrative keeping re-steepening reflexes at bay

Markets are expecting the Federal Reserve to hike one more time at the upcoming May meeting. It is widely assumed that this will also be the last time the Fed will increase rates, thus concluding the current tightening cycle. This warrants a closer look at how market rates have behaved around previous similar turning points. Below we illustrate market patterns around the end of the past four tightening cycles starting in 1994 through to 2015.

The Fed could start cutting earlier and more substantially than markets currently price

Every tightening cycle had its unique set of circumstances, and a lot hinges on the ‘landing’ of the economy that the Fed achieves. A softer landing means that policy rates can remain at the peak level for a more prolonged time, such as happened in 1994-95 or 2004-06. Looking at the current cycle, markets fully discount a first 25bp cut six months from the peak, implying a relatively short period of stable rates. Our economists think the Fed could start cutting even earlier and more substantially than markets currently have priced.

Fed tightening cycles since 1994, including the current one.

Fed Tightening Cycles Since 1994
Fed Tightening Cycles Since 1994

Source: FRED, Refinitiv, ING

10Y yields are already looking downward from here

Outright 10Y Treasury yields usually peak before or at the latest with the final Fed hike. They trended lower to turn around only after the first couple of cuts have been completed. For the current cycle, we are relatively confident that the peak since the banking turmoil has added the prospect of a credit crunch to the equation. Inflation trending lower, plus a flight from riskier assets, are the common factors weighing on longer-term rates post the Fed peak.

Our own forecast sees 10Y UST yields falling toward 3% by the end of this year with the Fed itself seen lowering key rates to the same level by mid-2024. A pick up in 10Y rates thereafter should then largely come with brightening economic prospects.

10Y UST yields usually peak before or at Fed tightening cycle highs.

10Y UST Yields Chart
10Y UST Yields Chart

Source: Refinitiv, ING

The re-steepening of the 2s10s curve usually only picks up once rate cuts are imminent.

For the yield curve, illustrated with the 2s10s UST curve, reaching the peak in the policy rate has usually marked the end of the more pronounced curve flattening dynamic. In the initial months, the curve proved quite stable. While the front part of the curve 2s5s in many instances still trended flatter, this was compensated by the 5s10s segment starting to steepen.

In other words, the 5-year part of the curve outperformed in anticipation that cuts would eventually follow a period of stable rates. Only once the prospect of rate cuts became more imminent, leading the 2-year rate to also follow lower, did the 2s10s curve start to display a steepening dynamic. The common observation is that flattening, if it occurs, is limited and largely temporary.

2s10s UST: past the policy peak, re-steepening dynamics only pick up closer to actual rate cuts.

2s10s UST Chart
2s10s UST Chart

Source: Refinitiv, ING

The Fed pushing a higher-for-longer strategy prevents near-term re-steepening dynamic

A key takeaway for the UST curve is that it is more the prospect of interest rate cuts that re-steepen the curve rather than the end of hikes – we currently have the first rate cuts penciled in for the fourth quarter of this year. The higher-for-longer scenario that the Fed is currently pushing on the back of signs that the banking turmoil might blow over raises the risks that the central bank might not cut anytime soon. This would, at the least, prolong the period until we see the re-steepening dynamic taking hold. But as mentioned before, material curve flattening at this stage of the cycle is rare and usually not persistent.

Looking at current valuations going into the Fed’s next policy phase, the 2s10s curve remains historically flat/inverted to begin with, even after the snap re-steepening in the wake of the latest banking turmoil. That arguably leaves more room for the curve to re-steepen going forward and suggests that setting steepeners as the Fed peaks are a low-risk strategy. The real issue that market participants face is the high running cost of funding the curve-steepening strategy, especially if gains from the actual re-steepening take time to realize. That is also one reason why we see longer periods of relative curve stability.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Original Post

Looking Past the Peak of Fed Key Rates
 

Related Articles

James Picerno
Politics and Policy Clouds Path Ahead for Fed By James Picerno - Feb 25, 2025

The central bank’s job is never easier, but in the current climate, it’s unusually tricky. In addition to the usual challenges that complicate real-time monetary policy decisions,...

Charles-Henry Monchau
7 Key Charts on the Current State of the Global Economy By Charles-Henry Monchau - Feb 25, 2025

The EU’s most costly budgets, bitcoin’s market swings, and rising US bankruptcies. Each week, the Syz investment team takes you through the last seven days in seven charts. 1. The...

Lance Roberts
Margin Balances Suggest Risks Are Building By Lance Roberts - Feb 24, 2025

Last week, we discussed that continued bullish exuberance and high levels of complacency can quickly turn into volatility. As we noted then, introducing an unexpected, exogenous...

Looking Past the Peak of Fed Key Rates

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Apple
Continue with Google
or
Sign up with Email