Short-term treasury yields have risen considerably in the last month. Since the September Fed meeting, the language of the Fed minutes, as well as Yellen’s actual testimony, suggests that the Fed is actually planning on pulling the trigger this December and will raise the Federal Funds rate by 25 basis points. Market behavior supports this as short term rates have already increased by roughly 25 basis points, and Fed Funds futures are now priced as if there will be a rate increase.
As for having an impact on markets, we believe it is more likely that the potential rate increase is already priced into current rates. If the Fed does in fact increase rates, don’t expect to see a sudden increase other interest rates as well. The opposite is more likely to be true, that in the off chance that the Fed does not raise the Fed Funds rate, bond markets will see increased prices and contracting rates.
Overall the economic data has been strong in the last month, continuing to suggest the Fed will tighten. The October employment report revealed that over 270,000 jobs were created in October, which was nearly 100,000 more than expected. Additionally, the unemployment rate finally reached an even 5.0 percent. November’s employment report will be the last before the Fed’s December meeting. If that report is equally strong, the Fed’s tightening will be considered nearly sure thing.
I have been saying for weeks now that the larger range for the 10-year treasury yield is between 1.90% and 2.30%. Finally last week we saw yields actually rise through the 2.30% support level, and touch the very top of the channel at 2.37%. The channel now is between 1.97% and 2.35%. This morning the 10-year yield is lower at 2.23%, and is trending back towards the middle of the range.
Eric Swanson, CFA