Market Sees 90% Chance Of Rate-Hike By Sept 2022, Long-Bond Screams 'Policy Error'

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by Tyler Durden
Wednesday, Oct 13, 2021 - 09:47 AM

The last few days have seen short-term rate trajectories surge higher and this morning's hotter than expected headline CPI pushed that one step further.

Source: Bloomberg

This has pushed the market's expectation to the point where it sees a 90% chance of a rate-hike by September...

Source: Bloomberg

That is well ahead (more hawkish) of The Fed's dot-plot expectations (and we also note that the market has caught UP to The Fed's 2023 expectations, as it was previously more dovish than The Fed)...

Source: Bloomberg

Nomura's Charlie McElligott notes that the global front-end is scrambling to pull-forward timing on potential hikes (thus adding risk premium), as Central Banks are forced to play “catch-up” and put the genie back in the bottle

  • For example, there are BIG short positionings being built in Dec22 ED$, which are pricing-in their most hawkish scenario of this cycle, which is corresponding with OI at highs

  • And it’s everywhere across the ED$ curve--ITC: “Since close of 7th Oct, largest changes and all look to be adding to or putting on new shorts: M2 +99k, U2 +34.2k, Z2 +107.5k, Z3 +52k and Z4 +25k”

  • Similarly, looking at systematic trend, we see the Nomura QIS CTA model with “-100% Short” signals established in Eurodollars, Euribor and Sterling contracts over the past 1w+ (only EuroYen as a “long”)—while CTA signals in G10 Bond futs is consensus “short” as well across USD 10Y, EUR, JPY, GBP, AUD, CAD, CHF, FRA and ESP (only ITA holding as a standout “+42% Long”)

  • So... bearish Rates / fixed-income is getting pretty crowded again.

However, while the front-end is leading The Fed down a hawkish rate-hike path, the back-end is screaming "policy error" as the yield curve bear-flattens...

Source: Bloomberg

The Fed has a problem.