US: Yield curve, Fed and reality pricing

It is expected that the Fed will start increasing interest rates within the year.

It is expected that the Fed will start increasing interest rates within the year. Therefore, we will wait for the tightening expectations to move the markets, in this respect, the bond spread will be important in the US. We shared that the movement in the 2-year bond was shaped by short-term expectations. The 10-year maturity is next, and we're seeing a 10-year yield rise to 1.63% ahead of the FOMC minutes this week. The Fed's market operations are in line with its strategy of withdrawing liquidity. Still, as Covid and supply risks pose a descent risk in the economy, it will be cautious at the first stage, but the base scenario is now that there will be 3 rate hikes in 2022.

 

US 2 – 10 year bond yield spread… Source: Bloomberg

 

Another reality has to do with the US – German spreads. As of November, inflation is 6.8% in the US and 4.9% in the Eurozone. In 2022, 3 rate hikes from the Fed and possibly 0 from the ECB are expected. The potential for economic crisis and policy/inflation expectations will widen the yield gap in favor of the US.

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