What Fed terminal rate is currently priced into the bond market?

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strummer6969
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What Fed terminal rate is currently priced into the bond market?

Post by strummer6969 »

Fedwatch shows 4-4.5% at year end. As to the terminal rate that is expected by the market, I have not found anything.

This is not to start a debate about what the terminal rate will be or ought to be. I'm just trying to understand what is priced in.
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vineviz
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Re: What Fed terminal rate is currently priced into the bond market?

Post by vineviz »

strummer6969 wrote: Fri Sep 16, 2022 11:09 am Fedwatch shows 4-4.5% at year end. As to the terminal rate that is expected by the market, I have not found anything.

This is not to start a debate about what the terminal rate will be or ought to be. I'm just trying to understand what is priced in.


The "terminal" rate priced into bond futures appears to be about 4.00% to 4.50%.

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https://www.cmegroup.com/trading/intere ... -fomc.html
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strummer6969
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Re: What Fed terminal rate is currently priced into the bond market?

Post by strummer6969 »

vineviz wrote: Fri Sep 16, 2022 11:14 am
strummer6969 wrote: Fri Sep 16, 2022 11:09 am Fedwatch shows 4-4.5% at year end. As to the terminal rate that is expected by the market, I have not found anything.

This is not to start a debate about what the terminal rate will be or ought to be. I'm just trying to understand what is priced in.


The "terminal" rate priced into bond futures appears to be about 4.25% to 4.50%.

Image

https://www.cmegroup.com/trading/intere ... -fomc.html
Thanks.
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jeffyscott
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Re: What Fed terminal rate is currently priced into the bond market?

Post by jeffyscott »

FYI, to see that chart, just go to the "probabilities" view at the linked fedwatch site.
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Trance
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Trance »

Am I reading this right that its "expected" that the federal interest rate will go to 4-4.5%?
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Re: What Fed terminal rate is currently priced into the bond market?

Post by alex_686 »

Trance wrote: Fri Sep 16, 2022 8:39 pm Am I reading this right that its "expected" that the federal interest rate will go to 4-4.5%?
That the Federal Reserve Rate will go to 4.5% in a year? Yes.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Marseille07 »

strummer6969 wrote: Fri Sep 16, 2022 11:09 am Fedwatch shows 4-4.5% at year end. As to the terminal rate that is expected by the market, I have not found anything.

This is not to start a debate about what the terminal rate will be or ought to be. I'm just trying to understand what is priced in.
What exactly do you mean by the terminal rate? The FedWatcher only shows the futures market spanning out till July 2023. That's just how far ahead they show the data as of Sept 2022, not when the Fed might stop hiking.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by vineviz »

Marseille07 wrote: Fri Sep 16, 2022 8:56 pm
strummer6969 wrote: Fri Sep 16, 2022 11:09 am Fedwatch shows 4-4.5% at year end. As to the terminal rate that is expected by the market, I have not found anything.

This is not to start a debate about what the terminal rate will be or ought to be. I'm just trying to understand what is priced in.
What exactly do you mean by the terminal rate? The FedWatcher only shows the futures market spanning out till July 2023. That's just how far ahead they show the data as of Sept 2022, not when the Fed might stop hiking.
The futures market are priced as if the the last rate hike will be in December or February, and that there is a small (but growing) chance of rate cuts after that.

“Terminal rate” just refers to the highest (expected) Fed funds rate this cycle, which is 4-4.5% as of today.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Marseille07 »

vineviz wrote: Fri Sep 16, 2022 9:21 pm The futures market are priced as if the the last rate hike will be in December or February, and that there is a small (but growing) chance of rate cuts after that.

“Terminal rate” just refers to the highest (expected) Fed funds rate this cycle, which is 4-4.5% as of today.
Thank you, your explanation makes sense.
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Trance
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Trance »

alex_686 wrote: Fri Sep 16, 2022 8:52 pm
Trance wrote: Fri Sep 16, 2022 8:39 pm Am I reading this right that its "expected" that the federal interest rate will go to 4-4.5%?
That the Federal Reserve Rate will go to 4.5% in a year? Yes.
Holy cow, so we could see bonds and CD yields hitting 5-6% yield?
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Re: What Fed terminal rate is currently priced into the bond market?

Post by strummer6969 »

vineviz wrote: Fri Sep 16, 2022 9:21 pm
Marseille07 wrote: Fri Sep 16, 2022 8:56 pm
strummer6969 wrote: Fri Sep 16, 2022 11:09 am Fedwatch shows 4-4.5% at year end. As to the terminal rate that is expected by the market, I have not found anything.

This is not to start a debate about what the terminal rate will be or ought to be. I'm just trying to understand what is priced in.
What exactly do you mean by the terminal rate? The FedWatcher only shows the futures market spanning out till July 2023. That's just how far ahead they show the data as of Sept 2022, not when the Fed might stop hiking.
The futures market are priced as if the the last rate hike will be in December or February, and that there is a small (but growing) chance of rate cuts after that.

“Terminal rate” just refers to the highest (expected) Fed funds rate this cycle, which is 4-4.5% as of today.
Yes, that's exactly what I was asking. It seems like the bond market has priced in much of the 'front loading' of rate hikes. I can never be sure about equities though. Earnings will be important.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by vineviz »

Trance wrote: Fri Sep 16, 2022 9:31 pm
alex_686 wrote: Fri Sep 16, 2022 8:52 pm
Trance wrote: Fri Sep 16, 2022 8:39 pm Am I reading this right that its "expected" that the federal interest rate will go to 4-4.5%?
That the Federal Reserve Rate will go to 4.5% in a year? Yes.
Holy cow, so we could see bonds and CD yields hitting 5-6% yield?
Maybe, maybe not. Net other of your hose things necessarily move directly with the Federal funds rate.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Marseille07 »

strummer6969 wrote: Fri Sep 16, 2022 10:00 pm Yes, that's exactly what I was asking. It seems like the bond market has priced in much of the 'front loading' of rate hikes. I can never be sure about equities though. Earnings will be important.
Well, a big caveat is that there's no guarantee they're correct at all, just that we see how they're placing their bets in the futures market.

Just a couple of weeks ago, the futures market thought the FF rate will only be 3.75% by July 2023. I remember this because I discussed this with another poster.
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strummer6969
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Re: What Fed terminal rate is currently priced into the bond market?

Post by strummer6969 »

Marseille07 wrote: Fri Sep 16, 2022 10:05 pm
strummer6969 wrote: Fri Sep 16, 2022 10:00 pm Yes, that's exactly what I was asking. It seems like the bond market has priced in much of the 'front loading' of rate hikes. I can never be sure about equities though. Earnings will be important.
Well, a big caveat is that there's no guarantee they're correct at all, just that we see how they're placing their bets in the futures market.

Just a couple of weeks ago, the futures market thought the FF rate will only be 3.75% by July 2023. I remember this because I discussed this with another poster.
I agree, they're likely underestimating how high the FF rate will go. Neutral won't be enough but it'll depend on the strength of the economy when we get there and whether there's political will to keep going.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by countmein »

Therefore, shorting short duration treasuries is a sure bet?
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Re: What Fed terminal rate is currently priced into the bond market?

Post by UpperNwGuy »

countmein wrote: Fri Sep 16, 2022 10:15 pm Therefore, shorting short duration treasuries is a sure bet?
Is that what you're doing?
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Re: What Fed terminal rate is currently priced into the bond market?

Post by acegolfer »

countmein wrote: Fri Sep 16, 2022 10:15 pm Therefore, shorting short duration treasuries is a sure bet?
Shorting a 3-mo T-bill is a guaranteed way to lose money in 3 months.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Hola »

What does terminal rate matter for the bogleheads type?
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Re: What Fed terminal rate is currently priced into the bond market?

Post by anon_investor »

It will be interesting see what LTT rates willbe when the FF rate hits over 4%.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Robot Monster »

anon_investor wrote: Sun Sep 18, 2022 7:41 am It will be interesting see what LTT rates willbe when the FF rate hits over 4%.
Well, maybe that should be reworded to say if the FF rate hits over 4%, because, after all, nothing is guaranteed, and the future is uncertain.

But another thread was already derailed over speculation about where LTT rates are headed, so...let's not derail this one.

No speculation about that. None. Ziltch.

No sir.

I mean, maybe a little.

I did see that, well...
Given our view that Fed tightening will continue to slow growth and cool inflation, we believe that the worst of the rise in bond yields is probably behind us for this cycle, and that the more rapid and forceful Fed tightening is going forward, the higher the risk of recession. In this environment, the dominant trend is likely going to continue to be an inverting yield curve.
Schwab link

Sorry, I just had to share that.

Let's end it there, though.

Just pretend I didn't say anything.

I mean, this is from February:

"We cannot rule out higher yields near-term but have not changed our lower-for-longer bond yield forecasts... Today our end-2022 forecast is 1.5% and for end-2023 it is 1.0%:" HSBC's Steven Major in a report today Twitter source link

Guess that's still possible, but...

Yeah.

Moving on...
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Re: What Fed terminal rate is currently priced into the bond market?

Post by strummer6969 »

Hola wrote: Sun Sep 18, 2022 7:35 am What does terminal rate matter for the bogleheads type?
Morbid curiosity. The more I know, the less I'm sure of anything. I guess it keeps me from fooling myself.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by BlueEars »

But is quantitative tightening priced into the bond market? The author of this article seems to think the answer is "not quite".

https://tipswatch.com/2022/08/07/is-the ... t-so-much/

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Re: What Fed terminal rate is currently priced into the bond market?

Post by Robot Monster »

BlueEars wrote: Sun Sep 18, 2022 11:56 am But is quantitative tightening priced into the bond market? The author of this article seems to think the answer is "not quite".

https://tipswatch.com/2022/08/07/is-the ... t-so-much/
Unsure I understand that conclusion, that QT isn't being priced in sufficiently. I do see where the article says unexpected stuff might happen...

"September and beyond is when Wang warns something is apt to break, not unlike what happened the last time the Fed embarked on QT"

But, unexpected stuff happening, stuff that runs afoul of the Fed's own plan, cannot be priced in, right?

Elsewhere in the article I see he makes the case that the Fed will have to ramp up its plans in order to bring inflation down, but he concludes that:
Unfortunately, that sort of sustained tightening is not likely. And so … inflation will continue to be a problem. And inflation protection continues to make sense as part of your asset allocation.
PS David Enna, the writer of the article, posts here sometimes. He seems like a nice guy.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by grok87 »

i think 4.5%
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Marseille07 »

Checking Fedwatchers, looks like 425~450 until the end of 2023.

I think they're underestimating but that's the story as of this moment.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by whodidntante »

acegolfer wrote: Sun Sep 18, 2022 7:20 am
countmein wrote: Fri Sep 16, 2022 10:15 pm Therefore, shorting short duration treasuries is a sure bet?
Shorting a 3-mo T-bill is a guaranteed way to lose money in 3 months.
Don't know how one would go about shorting a 13-week T-bill, other than by paying taxes. :happy I guess you could approximate it by shorting ETFs. But futures are available starting at 2-year Treasuries. Shorting that contract would not be a guaranteed loss after two years. Aren't derivatives and duration fun?
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Re: What Fed terminal rate is currently priced into the bond market?

Post by jeffyscott »

Marseille07 wrote: Wed Sep 21, 2022 11:42 pm Checking Fedwatchers, looks like 425~450 until the end of 2023.

I think they're underestimating but that's the story as of this moment.
They show about 70% odds of 4.5-4.75 (or higher) in February and about 30% odds of 4.75-5 or higher later in spring.

Regarding shorting talk above, isn't the fedwatch site based on Fed rate futures, which those think they know where things are going can use to place their bets directly, rather than shorting T-bills?
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Re: What Fed terminal rate is currently priced into the bond market?

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If removed an off-topic comment. As a reminder, see: General Etiquette
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Re: What Fed terminal rate is currently priced into the bond market?

Post by skierincolorado »

]
acegolfer wrote: Sun Sep 18, 2022 7:20 am
countmein wrote: Fri Sep 16, 2022 10:15 pm Therefore, shorting short duration treasuries is a sure bet?
Shorting a 3-mo T-bill is a guaranteed way to lose money in 3 months.
whodidntante wrote: Thu Sep 22, 2022 1:33 am Don't know how one would go about shorting a 13-week T-bill, other than by paying taxes. :happy I guess you could approximate it by shorting ETFs. But futures are available starting at 2-year Treasuries. Shorting that contract would not be a guaranteed loss after two years. Aren't derivatives and duration fun?
I think one could sell eurodollar futures. Because the seller captures the current finance cost, the return could easily be positive if rates go up more than expected. Not sure about all this though as I have not done it myself. But it wouldn't make sense that buying eurodollae futures always make money, and if the buyer is losing money sometimes the seller is making money
https://www.spglobal.com/spdji/en/indic ... /#overview
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Re: What Fed terminal rate is currently priced into the bond market?

Post by acegolfer »

skierincolorado wrote: Thu Sep 22, 2022 3:09 pm I think one could sell eurodollar futures. Because the seller captures the current finance cost, the return could easily be positive if rates go up more than expected. Not sure about all this though as I have not done it myself. But it wouldn't make sense that buying eurodollae futures always make money, and if the buyer is losing money sometimes the seller is making money
https://www.spglobal.com/spdji/en/indic ... /#overview
Buying/shorting Eurodollar futures is fundamentally different from buying/shorting Treasuries.

Companies short Eurodollar futures to hedge against higher future short term borrowing rate.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by skierincolorado »

acegolfer wrote: Thu Sep 22, 2022 3:35 pm
skierincolorado wrote: Thu Sep 22, 2022 3:09 pm I think one could sell eurodollar futures. Because the seller captures the current finance cost, the return could easily be positive if rates go up more than expected. Not sure about all this though as I have not done it myself. But it wouldn't make sense that buying eurodollae futures always make money, and if the buyer is losing money sometimes the seller is making money
https://www.spglobal.com/spdji/en/indic ... /#overview
Buying/shorting Eurodollar futures is fundamentally different from buying/shorting Treasuries.

Companies short Eurodollar futures to hedge against higher future short term borrowing rate.
Regardless of what companies use them for, eurodollar futures return very similarly to holding actual treasury bills. If they did not there would be an arbitrage opportunity to earn a risk free return above the risk free rate.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by acegolfer »

skierincolorado wrote: Thu Sep 22, 2022 3:52 pm
acegolfer wrote: Thu Sep 22, 2022 3:35 pm
skierincolorado wrote: Thu Sep 22, 2022 3:09 pm I think one could sell eurodollar futures. Because the seller captures the current finance cost, the return could easily be positive if rates go up more than expected. Not sure about all this though as I have not done it myself. But it wouldn't make sense that buying eurodollae futures always make money, and if the buyer is losing money sometimes the seller is making money
https://www.spglobal.com/spdji/en/indic ... /#overview
Buying/shorting Eurodollar futures is fundamentally different from buying/shorting Treasuries.

Companies short Eurodollar futures to hedge against higher future short term borrowing rate.
Regardless of what companies use them for, eurodollar futures return very similarly to holding actual treasury bills. If they did not there would be an arbitrage opportunity to earn a risk free return above the risk free rate.
Let me clarify my original statement. When one borrows $97 and pays back $100 after 3 months, that's a guaranteed loss of $3 from this transaction.
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Re: What Fed terminal rate is currently priced into the bond market?

Post by skierincolorado »

acegolfer wrote: Thu Sep 22, 2022 4:37 pm
skierincolorado wrote: Thu Sep 22, 2022 3:52 pm
acegolfer wrote: Thu Sep 22, 2022 3:35 pm
skierincolorado wrote: Thu Sep 22, 2022 3:09 pm I think one could sell eurodollar futures. Because the seller captures the current finance cost, the return could easily be positive if rates go up more than expected. Not sure about all this though as I have not done it myself. But it wouldn't make sense that buying eurodollae futures always make money, and if the buyer is losing money sometimes the seller is making money
https://www.spglobal.com/spdji/en/indic ... /#overview
Buying/shorting Eurodollar futures is fundamentally different from buying/shorting Treasuries.

Companies short Eurodollar futures to hedge against higher future short term borrowing rate.
Regardless of what companies use them for, eurodollar futures return very similarly to holding actual treasury bills. If they did not there would be an arbitrage opportunity to earn a risk free return above the risk free rate.
Let me clarify my original statement. When one borrows $97 and pays back $100 after 3 months, that's a guaranteed loss of $3 from this transaction.
Depends what you do wirh the 97 you borrowed. In a arbitrage free model you would at minimum invest it at the risk free rate. Any kind of investment vehicle that actually allows you to short such a bond would implicitly include this in the return. Unless you are the issuer of the bond in which case you get to choose what to do with the 97 dollars
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Re: What Fed terminal rate is currently priced into the bond market?

Post by Robot Monster »

Of possible interest...

FOMC Dot Plot, as of 9/21/2022
Image
Source: Schwab link
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