Bond market pricing in at least one interest rate hike in 2022


One of investors’ biggest fears so far in 2021 is that higher-than-expected inflation could prompt the Federal Reserve to act sooner and more aggressively with tightening measures, including possible rate hikes. of interest.

Over the past month, bond market investors have become less certain that the Fed will raise interest rates before 2023, but they are still pricing in a greater than 50% chance of at least one interest rate hike in 2022.

Numbers: According to CME Group’s FedWatch tool, the bond market is currently pricing in a 56.8% chance of a rate hike by December 2022. The good news for equity investors is that this chance is down from to 70.2% just a month ago.

Last week, the Department of Labor announced that its consumer price index (CPI) had jumped 5.4% from a year ago, its strongest year-over-year growth since August 2008. Core CPI growth, which does not include food and energy prices, rose 4.5%. % in June, its biggest jump since September 1991.

The Federal Reserve has consistently said 2021’s high inflation levels are “transitional” as the economy reopens after the pandemic and investors shouldn’t worry that recent inflation readings are fine. above the Fed’s long-term 2% target.

“We’ve identified half a dozen things ‘that look a lot like temporary factors that will subside over time,'” Fed Chairman Jerome Powell told Congress last week.

The consensus among bond investors seems to be that the Fed’s first rate hike won’t come until at least the second half of 2022. The bond market is currently pricing a 0% chance of a rate hike by the end of 2021 and only an 18.1% chance of an interest rate hike by June 2022.

Investors trust the Fed: On Monday, DataTrek Research co-founder Nicholas Colas said a late-2022 timeline for Fed action suggests bond investors aren’t overly concerned about inflation.

“This seems correct to us and implies that US inflation will decline in line with the Fed’s view that current levels above 5% are transitory,” Colas said.

“Federal funds futures have a good history of seeing through the Fed’s sometimes misguided policy views, so their current price implies the FOMC has more good things than bad.”

Benzinga’s opinion: The Fed has encouraged investors to mostly ignore inflation numbers for now, and the SPDR S&P 500 ETF Trust’s 12.9% year-to-date gain suggests they’ve mostly listened until now.

This story originally appeared on Benzinga. © 2021

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