Unusual dynamics in the bond market are showing that investors are prepping for rate hikes — and some think that’s a positive signal for the long-term economy.
Driving the news: The yield curve got flatter this week.
- In other words, yields on shorter-term Treasuries went up, while longer-term Treasuries went down — and the spread between the two got smaller.
Why it matters: Short-term rates moving up show that investors think the current bout of inflation may ultimately pull forward a rate liftoff by the Federal Reserve to the middle or end of next year. Compare that to the beginning of this year, when a rate hike wasn't expected until 2023.
What they're saying: “Pricing in the Fed rate hikes at the front end of the curve is really boosting confidence at the back end of the curve,” says Robert Tipp, chief investment strategist at PGIM Fixed Income. That’s because the notion that the Fed may be willing to spring into action to keep a lid on runaway inflation is reassuring over the longer run, he says.
- “I think the long yields are telling us that the bond market isn’t overly concerned about the economy getting to a level of excess, or an economy in which runaway inflation is a huge problem,” says Brian Levitt, global market strategist at Invesco.
State of play: Fed governors, in speeches and in their "dot plot," have suggested they're open to the idea of a rate hike next year.
What we're watching: All eyes will be on Fed chair Jerome Powell at next week's press conference for hints on the central bank's evolving views on rate hikes — as well as its upcoming taper of emergency bond purchases.