Futures positions imply a 92% chance the Fed will hike in Dec and 50% again in March. How will the yield curve respond?

Let’s start with a discussion of how the short-end of the yield curve will act.

The following chart shows that when the yield on 3-month treasuries jumps above the Fed Funds rate, a rate hike is imminent.

CME futures suggest a 92% chance in December and just over 50% in March.

If the Fed does get in two rate hikes, what would the yield curve look like?

I suggest something like the following.

3-Month to 10-Year US Treasury Yield Projection

My base assumption is consumer price inflation is not about to jump significantly higher, and if not, there will be downward pressure on long-term yields.

The short-end of the curve is easier to predict. Add 50 basis points of hikes, then subtract about 5-10 basis points corresponding to the patterns in the first chart.

Inversion Chances

The blue oval represents an area in which we may see a yield curve inversion (longer-dated treasuries yield less than shorter-dated treasuries).

Should that occur, it will be a strong recession warning.

An inverted curve does not guarantee a recession, however, nor does lack of inversion mean a recession will not happen.

Regardless, we are very close to the end of this rate hike cycle.