US Fed: A fata morgana hiking cycle?

  • While the rate lift-off might already start in March, signals are piling up that the Fed might break its hiking cycle after 2-3 hikes, much earlier than markets currently expect.
  • The steepness of the US curve is very flat compared to earlier lift-off phases, swap Forwards shows inversion patterns that usually appear in late phases of hiking cycles and the 12-months drawdown of US equities is already at -8.3%. In the last 50 years only 16% of all Fed rate hikes occurred when the equity drawdown was that high.
  • The main market risk might not be the Fed falling behind the curve, but investors being positioned too far ahead of the curve.
  • Until the end of the year we see limited upside for 10y US Treasuries with quantitative tightening being the main upwards driver.
  • Even in the longer run it is most likely that “low for longer” will prevail. Long-term rates clearly above 3% would require extreme monetary tightening, total deanchoring of inflation expectations or massive government spending with a permanent GDP boost.


Alexis Garatti
Euler Hermes
Patrick Krizan
Allianz SE