The US Federal Funds Rate is likely to get restrictive within a year, moving above-neutral and thus impinging on growth. The expected quantitative tightening (QT) should yield a balance sheet runoff of $500 billion by the end of CY22 and $1.4 trillion in total by the end of CY23, notes a research report by Emkay Global Financial Services. 

A fair case for the US 10Y (10-year bond) nearing a peak in coming months is justified by a historically-steeper US money market curve and past cycle studies since the 1980s showing the 10Y yield levelling out around the terminal Federal Funds Rate or a year before the recession, adds the report. 

The UST 10Y (10-year Treasury bond) yield may peak at 3-3.5 per cent, but a renewal of the bull run in equities and credit markets looks unlikely. Historical precedent depicts that equities and credit struggle well after 10Y rates peak. We feel peak rates are just the prelude to the end of this short but explosive business cycle, notes the report. 

The US Fed is on its way to doing today what it hasn’t done in almost 30 years – a 50-bp hike (or on an outside chance, 75bps), en route to possibly turning restrictive within a year (implying going above the neutral policy rate, which would end up eventually impinging on growth), points out the report.