The bond market dismisses the FOMC’s hawkish signals The bond market dismisses the FOMC’s hawkish signals The bond market dismisses the FOMC’s hawkish signals

The bond market dismisses the FOMC’s hawkish signals

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The bond market's reaction was muted amid a hawkish Federal Reserve's meeting. Investors decided to focus on shorter-term economic dynamics such as the Delta variant dismissing signals of aggressive tapering and a Fed fund rate forecast of 1.8% for 2024, much higher than the Euro Dollar market pricing. Bond yields are likely to trade rangebound between 1.26% and 1.4% until it's evident inflation will not be transitory. Dropping longer-term yields drive the flattening of the yield curve, posing a problem if the central bank needs to hike interest rates soon. Tapering should help to steepen the yield curve unless US economic data continue to come in weak, pinning down long term yields.

In light of yesterday's FOMC meeting, the muted market reaction indicates that investors continue to focus on shorter-term economic dynamics such as Delta and employment rather than on inflation.

However, we believe that the Federal Reserve was relatively dovish yesterday:

  • It implied that tapering might be aggressive as it will possibly start as soon as November to finish by June next year. Powell even added that if needed, they’d speed up the tapering before rising rates. It shows that the Fed opens up to be even more aggressive depending on upcoming inflation readings. Also, half of the members see rates rising already in 2022 instead of 2023.
  • For the first time, it introduced a Fed funds rate forecast for 2024 of 1.8%, which is well above what the market expects in the eurodollar strip.
  • It significantly raised the PCE forecasts for 2021 to 3.7% from 2% in June, and for 2022 and 2023 to 2.3% and 2.2%. It shows that the central bank is beginning to resonate with the fact that inflation might end up being higher than their 2% target for a more extended period. When asked, Powell said, “if sustained higher inflation were to become a serious concern, the Fed would respond”. It sounds like that not only tapering could be more aggressive, but that interest rate hikes might start closer to the tapering end date, opposite to what was previously stated.
  • The dot plot showed that more members see rates rising already in 2022 instead of 2023 from the previous meeting.

How did the bond market react to yesterday's FOMC, and what is it telling us?

The yield curve flattened considerably, with the 5s30s year spread falling below 100bps for the first time since August last year.

The flattening was driven by 30-year yields dropping 4bps on the day, while 5-year rose only by 2.5bps. Longer-term yields dropped faster than shorter-term yields showing that the market is somewhat concerned about the Fed making a policy mistake.

Source: Bloomberg and Saxo Group.

The problem with dropping long-term yields is that if interest rates need to be hiked soon, it would be best for the yield curve to be steeper to avoid an inversion if the front part of the yield curve rises fast. In that respect, tapering should help unless US economic data continue to come in weak, pinning down the long part of the yield curve.

Today’s preliminary PMI indexes could confirm the market’s cautious stance if they come in weak as in August. Thus, bond yields might not move much until the next inflation read, trading rangebound between 1.26% and 1.4%.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992