Torsten Asmus
With the Federal Reserve’s monetary policy committee meeting coming up next week, Deutsche Bank takes a look at the average move of the 10-year Treasury yield (US10Y) for some clues as to whether the central bank has hiked rates for the last time in its tightening cycle.
The Fed hiked rates by another 25 basis points on July 26, bringing the federal funds rate target range to its highest level in 22 years at 5.25%-5.50%. The monetary policy committee earlier in June had held rates steady after ten consecutive boosts in just a little over a year.
According to the following chart from Deutsche Bank published on Friday, history has shown that the timing of the last hike in a Fed tightening cycle coincides very closely with the peak in the US10Y for the cycle.
“So if the last hike was at the July 27 meeting, then it shouldn’t have been a surprise (historically speaking) that the 10-year Treasury yield (US10Y) hit their new highs for the cycle soon after in August, when they hit 4.34%. With hindsight, it would have been more of a surprise if the highs had been last October, given that the Fed was still hiking for at least another 9 months from that point,” Deutsche Bank’s Jim Reid said.
Reid pointed out one cycle where the US10Y saw a notably higher peak several months before the last Fed rate hike in that cycle: back in 1984, when the instrument was 138 basis points above where it was on the day of the last hike.
Markets widely expect the Fed to hold rates steady at the meeting next week, with the CME FedWatch tool showing a 97% probability of no hike. In fact, markets believe the central bank will hold rates steady through to the end of the year, hinting that the overall consensus seems to be that the monetary policy committee has reached the end of its tightening cycle.
“The Fed are highly unlikely to hike next week but are also unlikely to take the last hike out of their dot plot for later in the year. So we won’t know for some time whether this is the peak or not. However, history tells us that on average, the last hike of the cycle is around the time that yields are more likely to hit their highs than any other,” Reid added.
The 10-year Treasury yield (US10Y) has retreated since closing at a YTD high of 4.34% on August 21, but not by much. As of its last close, the US10Y was down only 6 basis points from that peak.
See live data on how Treasury yields are doing across the curve at the Seeking Alpha bond page.
