US Rates: Life, Liberty, and the pursuit of hawkishness

[MUSIC] You're listening to at any rate, JP Morgan's Global Research podcast, where we take a look at the story behind some of the biggest trends in themes and fixed income currency and commodity markets today. I'm your host, Jay Barry, head of Global Rate Strategy at JP Morgan. Today, I'm joined by my colleague, Liam Wash, who is a US rate strategist. We are recording this podcast on Friday, June 26th, and it's interesting. It's been a relatively quiet week. From the data perspective, and after Chair Wash's Hawkes debut at the FOMC meeting last week, yields have declined and we've actually priced in a little bit less fed tightening. We think this is a perfect opportunity to take a look at what's happening in US rates markets to see if we can draw any parallels with any other times during the modern monetary policy era. I thought no one better to talk about it with me today than Liam. Liam, thanks for joining. Yes, thanks, Jay, for having me. Jay, before you dig in, what's the latest views on rates markets? I'm glad you asked Liam. I think when we wrote our mid-year outlook last week, we made the case that we are currently in an environment where an upwards low to the money market curve makes sense. That makes sense, particularly in the context of the news that we had out of the FOMC meeting a week and a half ago. Further from that, I would say that when we look at our valuation frameworks, intermediate yields are flagging as too low as well. Ten-year yields in our fair value framework currently appear about 25 to 30 basis points too low. Given how the markets are priced for medium-term fed policy, growth and inflation expectations, and the size of the fed's balance sheet. That's a pretty large deviation. It is the largest we've actually seen since just after the wake of the regional banking crisis in the spring of 2023. All in, this would tell me alongside what we've talked about the justification for an upwards slope to the OIS curve. That there is some risks that should reverse and move higher over the near term. But I guess the question is what could be the catalyst and we do have two big catalysts next week. The first is that chairwars will appear on a panel at the ECB's Center Conference alongside ECB President Lagarde, Bank of England, Governor Bailey, and Bank of Canada, Governor McLean. But I do wonder whether the chair will actually say anything new there. Particularly because he said very little with respect to the fed's reaction function or his own views on monetary policy at the meeting a week and a half ago. And there's been little data in the interim to change that. But the second and the bigger potential game changer for the treasury market and the US rates market more broadly, is the unemployment rate which the unemployment report which comes out on Thursday. That's meaningful because we've always found that the monthly establishment data and the household survey give us a very real time, rich cross section of data on the labor market and on the economy in general. And if we get another robust month of employment growth, markets may perceive the bar for the fed to hike actually to be lower right here. So that would sort of screen as bearish for me as well. But in the interim, I think we're cognizant that there are some near term rebalancing dynamics which could be bullish for the treasury market. In fact, that's probably or possibly what's been driving rates lower over the last week as well. Because the US has outperformed its developed market peers and the work that we've done. When you've had big equity outperformance over the course of a quarter relative to fixed income markets, it results in some rebalancing which is favorable for bond yields. And we've seen that in the weeks leading up to quarter ends in the past. So it could be that what we're seeing right now is some of that activity. But there's some likelihood that it could fall through into next week as well. So I think the near term risk is rates actually move lower heading into quarter end. But the medium term risk given our views on the economy and evaluation framework would indicate that rates are actually a little bit too low right here. And the medium term direction of travel is higher. And in fact, that's why our forecast for the end of the year looks for 10 year yields to ultimately move up to about 470 by the end of the year. But I think this is probably a pretty good segue. And on that note, you and I and the team we've been receiving a number of questions lately amid the hawkish pivot from the chair last week about whether there are any other comparable historical episodes. To which we can compare them when we're in right now. A Fed which engineered a full tightening cycle. Managed a series of mid cycle adjustments to ease policy away from restrictive levels. But managed to extend the expansion and then flip back to hiking. So you've done some work on this and are there any analogs in the modern monetary era for what we're seeing right now. Yeah, so looking back over time, there's very few in fact really only two episodes stand out as true mid cycle adjustments and both occurred during the boom years of the late 1990s. The first came in March 1997 when the fed raised rates by a single 25 basis point hike. Markets at the time were pricing in a more mature hiking cycle, but a series of global financial crises in East Asia and Russia over the next two years cut the hiking cycle short. In fact, the fed ease policy rates by 75 basis points in the fall of 1998 falling the collapse of long term capital management. The second mid cycle adjustment came in 1999 through 2000 when the fed raised policy rates by 175 basis points. But there are important nuances here, the first 75 basis points of hikes in 99 merely unwound the easing in 98 with FEMC statements at the time noting the recovery and financial market conditions by the fall of 99 the fed had reached a more neutral stance seeing symmetrical risks with regards to the outlook. However, strong demand for labor was overheating the economy and the fed continued to hike by another hundred basis points through May 2000. No, thanks for that. So there aren't many instances. It's kind of the unicorn of monetary policy, I guess, and those episodes that you've talked about in both 1997 and 1999. I actually remember that period well around the beginning of my my career. So I think the next question is you've identified these periods in which the fed has managed to tighten back after mid cycle adjustments. I think the real important question for us and for our listeners and our readers is how do the rates market respond in that era. What were the differences versus now and how can we apply this to what we see in the treasury market right now and how it may actually influence the direction of travel and rates over the medium term. Given the context, we think it makes most sense to focus on the last hundred basis points of hikes during the later mid cycle adjustment. So that would take us from November 1999 through May 2000. Here, 10 year treasury yields rose by roughly 70 basis points to reach a peak around 6.8% during the winter of 2000. Meanwhile, the 530s curve flatten sharply by around 85 basis points to reach its flattest levels by the May hike. But here, context matters too. Both the peak and intermediate yields and the majority of flattening over the period came in the January and February 2000 period. During this period, the fed changed to communications in a hawkish manner at its February FOMC meeting. The market expectations actually subsided in the wake in the meeting, which likely applied downward pressure on rates. However, we think fiscal policy changes were likely a more important driving force. To give some context, in the late 1990s, the government was running fiscal surpluses and treasury was concerned about the impact of shrinking debt outstanding on market functioning. In January 2000, then Secretary Summers announced a buyback facility focused on the long end in order to allow treasury to continue its long end issuance while ensuring a liquid trading market. Longer yields decline in the curve flattened sharply in the wake of the announcement. So when we put this all together and using this episode as a guide, this would suggest that the fed could raise rates by roughly 50 to 100 basis points if it pursued a proper mid cycle adjustment. We could see one year one year OIS increase another roughly 50 to 75 basis points towards pricing and accumulative 75 to 100 basis points of hikes. In this scenario, we would expect intermediate treasury yields could rise in additional 50 basis points and the 530s curve could flatten close to 30 basis points. This episode helps to inform a more hawkish upside risk toward modal rates forecast. No, that's that's great context, Liam. And I think that's probably the right way to look at this because the first 75 basis points and cuts were just taking back the easing. And the context on the curve matters as well as the magnitude of flattening that can occur. And I remember that period. Well, one of my first duties on the desk as a research analyst in 2000 was to capture the buyback results. And importantly, that was allowing the treasury market to maintain some liquidity at time when it was shrinking substantially. And it's incredible to see how far we've come. But I think this helps inform our view on on the level of rates and the shape of the curve as well. And the analysis you've done here is pretty important. And I think for that reasons, it's also why we think over the near term. The bigger risk away from that kind of near term downside risk to rates that we talked about is that there's also a risk the yield curve could flatten further. And not only do rates look too low in our frameworks, but but the long end of the curve looks too steep. And it looked like there was a pretty big divergence just a couple of weeks ago and it's closed somewhat. But I think that's a story here that if there's a risk that the tail risks are moving from the downside to the upside and that markets feel more comfortable pricing in that the Fed will need to take. Successive steps in order to raise policy rates and tighten policy somewhat. Then there is a risk that front end rates could move higher curves could flatten. And while the 99 guide is a good one, there are some important distinguishing factors that you need to take there. So thanks for joining today, Liam. And thanks to everyone for listening today. So I think it's a good place to leave it there. It's the end of June. It's the beginning of the summer. We're about to. embark on on summer holiday season and we thank you all for listening. So stay tuned for more episodes of at any rate, which is JP Morgan's Global Research Podcast series. This communication is provided for information purposes only. Please read JP Morgan Research reports related to its contents for more information, including important disclosures. Copyright 2026 JP Morgan Chase & Co. All rights reserved. This episode was recorded on June 26, 2026.