Deutsche Bank: Treasury Markets Are Starting to Send a Hike Signal - FJElite

Two weeks ago, household interest rate expectations were already pointing to the possibility that the Fed may hike rates over the coming year, with the Conference Board’s net interest rate expectations indicator shifting clearly toward higher rates over the next twelve months. Treasury markets are now sending a similar signal, with market pricing for the Fed path now implying just under 20bps of rate increases this year.

Another market metric is also pointing in the same direction. The spread between the 2-year Treasury yield and the effective fed funds rate is now around 45bps, after briefly moving above 50bps. Historically, that spread has been a reasonably good leading indicator for future changes in the fed funds rate. Over the past three decades, the gap between the 2-year yield and fed funds has led the year-on-year change in the policy rate by roughly eleven months, with a peak correlation of 66%.