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Bond market signals Fed rate-hiking limits
The bond market is increasingly pricing in a 'one-and-done' rate hike scenario followed by cuts, as long-term yields hit a ceiling despite rising oil prices.
The argument
The hosts argued that the historical correlation between rising oil prices and rising bond yields has broken down. They asserted that the bond market is shifting its focus from inflation fears to demand destruction and consumer weakness, which will ultimately force the Federal Reserve to halt rate hikes and eventually cut rates.
The thesis, stress-tested
✓ What validates it
- ✓A rapid inversion of the yield curve if the Fed hikes rates
- ✓TIPS break-evens continuing to decline despite elevated oil prices
▸ Risks discussed
- ▸The Federal Reserve under Kevin Warsh may hike rates more aggressively than expected to assert institutional independence
- ▸Persistent high gasoline prices could prolong consumer pressure before rate cuts materialize
Hear it yourself
"And the more that Treasury yields and tips break evens diverge from oil prices or the previous correlation where the market is pricing the Fed, the more that correlation breaks down, the more you know the market is thinking maybe we did pass it."
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