Bond yields pushing higher: To hike or to hold? | Forexlive

The market has had a rethink on what the FOMC will do this year after data pushed back on the idea of a recession.

The question now is whether the Fed will hike higher, or hold longer as the economy stays strong. BMO rates strategist Ian Lyngen weighs in today:

We maintain the next several months are going to be defined by a transition of the market’s reflection of hawkish central banking sentiment from pressing a higher terminal rate assumption to pricing in a longer time with rates at their peak than has historically been the case. After all, even the most optimistic outcome on inflation will leave core consumer prices well above 2% for an extended period of time, and given the Fed has consistently pushed back against the idea of amending the inflation target, there will come a point that Powell will need to acknowledge the damage that will be wrought on the labor market and growth. Especially as chatter mounts that a severe recession will be needed to achieve 2% core inflation, the pressure on the Fed will increase the longer time rates remain in restrictive territory. It’s primarily for this reason that we anticipate holding rates high will be the optically and politically favorable option as opposed to continuing to hike even as the unemployment rate climbs. The Fed will do what it takes to achieve the inflation mandate, even if it will be a lengthier road to achieve that goal with loftier consumer prices a central feature of economy in the interim – the other higher for longer.

The bolded points is one worth considering right now, particularly on employment. Yes, it’s at a record low right now but another way to look at that is that it can only travel on one direction from here — higher. The day of rising unemployment will come and all the pressure on the Fed to hike now will reverse. That’s why holding at 5.25-5.50% may be the optimal strategy from here.

As for bonds, the 10-year today broke above 3.9% and is now set to challenge 4% once again. After that, there isn’t much standing in the way of 4.25%.