Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
As recently as one month ago (March 9), the Fed Funds Future implied rate for the upcoming FOMC meeting on March 22 was 4.963% (leaning toward a 50 basis point (bp) hike) and 5.515% for July. Two common inflation measures, Personal Consumption Expenditure (PCE) and Consumer Price Index (CPI) reflected fairly high inflation measures of 6.0% and 4.67% respectively. The 10-year Treasury yield closed on March 9 at 3.90%. On March 10, Silicon Valley Bank was taken over by regulators.
Two extreme options existed. If the Fed hiked rates 50bp, it might exasperate a pending banking crisis fueling potential bank runs (exaggerated deposit withdrawals) and thus unfold a liquidity issue ironically in an environment seemingly flush with cash. If the Fed did nothing, it could be interpreted that they were very worried about a bank run contagion and fuel the panic. On March 22, the Fed split the middle and raised the Fed Funds rate 25bp. The 10-year Treasury closed on March 22 at 3.44%.
PCE was released 10 days ago moving from 4.67% to 4.60%. CPI will be released on Wednesday moving from 6.0% to _?_ (anticipated to be 5.1%). With the intent of fighting inflation, the Fed has raised rates for nine consecutive meetings (since March 2022) totaling +475bp. The 10-year Treasury was 2.15% on the close before the first rate hike. Over the hike cycle, the 10-year yield peaked at 4.24% or 209bp higher than its start and currently is 3.3%. In other words, the 10-year Treasury has mustered up a 109bp change during the period when the Fed has aggressively elevated Fed Funds by 475bp.