The US 10 year yield is trading just off the high for the day and week at 3.134%. The current yield is at 3.126%.
Looking at the weekly chart, the yield is at the highest level since November 2018. The high yield in 2018 reached 3.248%. That is the next upside target. Move above that yield and the yield is at the highest level since April 2011.
A little history of the rates vs the Fed funds rate:
- The Fed Funds target rate in 2018 peaked at 2.25% to 2.5%. The current target rate is 0.75% to 1.0%. Clearly the market is pricing in additional fed hikes.
- The last fed hike back in 2018 was in December 2018 when they increased the target rate to 2.25% to 2.5% from 2.00% to 2.25%. the 10 year rate was around 2.9% in December 2018 as the market started to think in terms of “that is it”.
- The Fed cut rates in July 2019 and stepped down to 1.5% in November 2019. The 10 year yield was around 2% in November 2019
- In reaction to Covid, they slashed rates 0.0% to 0.25% in March 2020 where it stayed until March 2022. The 10 year yield bottomed in March 2020 at 0.333% right as the Fed cut to the lows.
- The Fed hiked by 0.25% basis points to 0.25% to 0.5% in March 2022. The 10 year yield was at 2.15%.
- They hiked 50 basis points last week to 0.75% to 1.00%.
In 2022, the rate low was at 1.529% in early January. The current yield is up 1.59% from that low.
What we know is the 10 year yield peaked a month before the last rate hike and bottomed the month of the last Fed funds rate cut.
The current fed rate is not at the high. The Fed is still 100 to 150 pips from what is a neutral rate at 2.0% to 2.5% (where rates peaked). Hence the desire to get there as fast as possible. The Fed is behind the curve and behind the market. The market is leading.
Does the current 10 year yield just 12 basis points from the December 2018 peak means the market is near the neutral rate ceiling? Yes it seems that way IF the terminal rate is at 2.5%.
However, if the terminal rate is going to be higher, there is room to roam to the upside at least given the price action from the last time the rates were near this area as compared to the Fed Funds target.