Yields Expected over Next Three Months

The implied Treasury yield 2-3 months ahead, based on 3 month and 1 month yields has fallen in the past two days.

Figure 1: Implied Treasury yield 2-3 months ahead, % (blue, left scale), and VIX (right scale). Source: Treasury, CBOE, via FRED, and author’s calculations.

Note implied interest rates at the May FOMC meeting dropped going from 2/23 to 2/24.

Source: CME FedWatch Tool, accessed February 24, 2022.

The probability implied for 75-100 bps Fed funds rate went from 44.4% down to 34.8%, while the probability for 50-75 bps went up from 44.5% to 60.3%, despite the fact that near month WTI futures closed up at over $95/bbl. So for the moment the uncertainties of war are dominating a potential oil induced cost-push shock, as far as the market’s thinking about Fed direction.