The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Yields
Yields continue to climb. Across the curve yields are making new highs. Stocks are falling modestly in response. Crude and the Iran situation continue to get attention in the press but they didn’t influence the major markets. All in all, it was a calm risk-off day.
Yields making new highs daily naturally leads to questions. For me, the key one is:
How high will they get?
Obviously, we have no answer but maybe we can speculate a bit. The Fed has been key in affecting yields and we can look at Fed Funds futures to start. That market prices peak rates in October of 2027, almost 1% higher than current rates. The priced Fed hiking cycle will last more than a year and involve about 5 hikes total. That is a far cry from where we were two months ago. If Fed Funds climb another 100 basis points, do we think that the entire yield curve will stay put?
I don’t think so. The hiking cycle is priced into Fed Funds futures so it *should* also be priced into Treasuries. However, if Fed Funds are 4.85%, I don’t think the 2-year will stay at 4.92%. Nor do I think the 30-year will be 5.55%. The term premiums just strike me as too thin in that world. My point is that the whole yield curve is likely to shift higher. If zero is unreasonable and 100 bips is what we’re seeing in Fed Funds futures, maybe we just split the difference.
So if the whole curve shifts up another 50 bips, what do we think the stock market is going to do?
I am not predicting a 50-bip shift. I just want to get us thinking about *how much further* yields might climb. It’s not crazy to suggest 100 bips, and even 25 bips seems pretty tame.
It strikes me that almost nobody is talking about the what-if scenarios. What if yields climb another 25-100 bips? It may not happen in a week, but maybe over the course of a month or two.
See you tomorrow.
-Mike
Visdom Market Commentary
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