How Long Will Interest Rates Rise?
No one knows, of course, but history can offer some perspective for what’s possible and so it’s useful to compare the current regime shift with previous runs of tighter policy.
To filter the changes in interest rates and emphasize the signal over noise I’m looking at the one-day differences in one-year changes and then transforming the data into Z-scores. For reference, I call this data a persistence index. Let’s review three key rates through this lens: the 10-year Treasury yield, the 2-year yield (a proxy for rate expectations), and the Fed funds target rate.
In the first chart, it’s clear that the 10-year rate’s recent pop is among the biggest upward shifts in years. That said, the degree of increase is not unprecedented. Given that inflation is still substantially higher than the 10-year rate it’s hardly a stretch to assume that the Treasury maturity can run higher still.