Bond Markets and Participants Say Raise Rates Mid 2022, FOMC Says WAY later (EOY 2022), Who is Correct?

Why this is important? Bond Markets are signaling a much faster interest rate increase(s) than Fed Speak… Someone is going to lose this game of chicken… Only time will tell us who?

Frequently, Wall Streeters (my nick name) are quoted as saying the smartest guys in the room are the Bond Markets/Participants.

Some of this rhetoric comes from the simplicity of a bond. Basically you have a time to payback (term) and risk of the asset (Quality i.e. Aa to junk).

With less to focus on, bonds and their players/participants are thought to have greater clarity…. However, in recent years (working on a decade now) the FOMC (Federal Open Market Committee) led by Jerome Powell currently, have been making direct purchases of bonds, causing possible distortions and lack of true free market discovery….

Well Maybe!

Recent Two Year Treasury Yields Rise Dramatically

Throwing water on the theme that the FOMC has taken TOTAL control of the bond market, this recent move in the 2 year treasury is signally to the FOMC by bond folks, they expect (and want) rate hikes sooner rather than later….. Hmmmmm

CME (Chicago Mercantile Exchange) FOMC Watch Tool

This neat CME Fed Watch Tool … overlays the current interest rates with a graph to show an expected increase time probability…

The way to read this chart is the orange represents the chance of a FOMC rate increase… March of 22 showing about a 20% chance of a FOMC rate increase….

Push forward to June 22, just two months later, and the probability of at least a .25% increase moves to about 80%!

The thing is, the FOMC is saying maybe one increase very late next year (2022), but certainly not the bond market/participants.

Wait too long and the FOMC may miss their chance to raise … raise too early (not likely at this time) and it could cause an unexpected headwind for the economy.

Let’s grab some popcorn and see who wins this tug of war!

Have a Great “Fed versus Bond Market” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.



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