US | Treasury yields priced in a more aggressive Fed after Sep's core inflation surprise

Summary

Rates are now pricing in that the Fed will not stop until data shows clear signs of easing inflation and a more balanced labor market. Another fourth 75 bp rate increase in Nov is locked in, while the odds of a fifth in Dec will continue to increase unless core inflation shows clear signs of easing.

Key points

• Key points:
• Treasury yields across the yield curve keep rising amid the expectation that the hiking cycle still has some way to go, moving decisively away from the (low) levels seen over the past 15 years.
• Volatility in the Treasury market is at peak COVID-crisis levels as evidenced by the bond market’s version of the VIX index, reflecting growing concerns about liquidity.
• A 75bp hike in November is fully priced in by the futures market, while the odds that the Fed hikes rates above the 5% threshold in 1H23 are rising.
• With the fed funds rate still far from peaking, avoiding a disorderly tightening of financial conditions is becoming increasingly challenging for policymakers.

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