US Fed's 2019 Rate path might flatten yield curve - Bloomberg

As reported by Bloomberg, markets may have shifted too far dovish on the US Federal Reserve, and investment analysts are concerned that the current scenario playing out could lift front-end rates.

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With traders pricing in less than one Federal Reserve interest-rate hike next year after an expected increase Wednesday, strategists at RBC Capital Markets and Morgan Stanley say the bond market may be in for a shock.

RBC’s Michael Cloherty and Morgan Stanley’s Matthew Hornbach expect the Federal Open Market Committee to keep its median forecast for 2019 at three rate increases, while many on Wall Street are leaning toward a markdown to two. That could drive two-year yields up by 5 to 6 basis points in a knee-jerk reaction, and lift 10-year yields by a smaller amount, flattening the curve, Cloherty said.

“The Fed doesn’t want to be seen as looking spooked by the recent volatility we’ve had, and doesn’t want to be seen as over-reacting,” Cloherty said. “And generally when the Fed stops hiking, it’s hard to get started again. It’s a hard line to walk.”