Title: Has the Federal Reserve reached the end of its tightening cycle? Clues from the 10-year Treasury Yield
The Federal Reserve’s monetary policy committee meeting is fast approaching, and analysts are closely examining the 10-year Treasury yield for any indications that the central bank has completed its tightening cycle. After the recent 25 basis point rate hike in July, the federal funds rate target range stands at its highest level in 22 years, reaching 5.25%-5.50%.
To gain insights into the timing of the last rate hike in previous cycles, experts have examined the historical movements of the 10-year Treasury yield. Deutsche Bank has released a chart that reveals a close correlation between the timing of the last hike and the peak of the US10Y for that cycle.
Analyzing the data, Deutsche Bank’s Jim Reid points out that if the last hike occurred in late July, as it did this year, it shouldn’t come as a surprise that the 10-year Treasury yield hit its high point for the cycle soon after, in August, reaching 4.34%. In retrospect, considering that the Fed continued hiking rates for another nine months after that point, it would have been more surprising if the yield had peaked in October.
There is one exceptional case in history, as Reid highlights. In 1984, the US10Y reached a notably higher peak several months before the last Fed rate hike in that cycle, making it an outlier amongst the observed patterns.
Market expectations for the upcoming Fed meeting lean towards no further rate hikes, with the CME FedWatch tool showing a 97% probability of rates being held steady. In fact, the consensus in the market appears to be that the central bank will maintain the status quo throughout the year, signaling the end of its tightening cycle.
Reid notes that while we won’t know for some time whether this recent rate hike is indeed the peak, historical data suggests that the last hike in the cycle is more likely to coincide with the highest yields.
Since reaching a year-to-date high of 4.34% on August 21, the 10-year Treasury yield has experienced a moderate decline, only decreasing by 6 basis points thus far.
As the Federal Reserve’s monetary policy committee prepares for its meeting, all eyes are on whether this recent hike will mark the end of the tightening cycle. Market participants eagerly await further signals from the central bank, ready to adjust their strategies accordingly.
By analyzing the movements of the 10-year Treasury yield over time, experts have gained valuable insights into the correlation between the last rate hike and the peak of the US10Y. As expectations remain high for no rate hikes in the near future, the consensus seems to suggest that the Federal Reserve may have indeed reached the end of its tightening cycle. However, only time will provide the certainty needed to confirm these speculations.
