If the FOMC opts for one more rate hike, and holds, the bond market will do the rest of the tightening. The rest of the Treasury yield curve will shift up towards 5%. The term premium should be positive. Real yields will rise further: 10 & 30-year TIPS yields could both climb to 2.5% within a year. Once again, Treasuries may not provide a good hedge for equities.
Ordinarily, higher oil prices would act as a dampener on US growth. But the US is now a net exporter of energy. The historical correlation between the dollar and oil prices has been upended, and they have been rising in tandem. But the strong dollar does not obviate the need for further tightening.
The transition to greener, renewable sources of energy will not be smooth, with OPEC+ ‘back in charge’ of oil markets. This latest increase in oil prices is a stark reminder of this. The jump in interest rates has raised the cost of capital for offshore wind, imperilling many projects, and the US and the UK’s green energy targets. If the green energy transition runs into speedbumps, this will simply introduce more volatility into energy markets, and increase the frequency of climate disasters. With heightened volatility, term premia should be positive.
In a bid to grab votes, more politicians may go the way of the UK prime minister, who announced yesterday exemptions and delays to several key green policies. This has been framed as a “pragmatic” approach, but countries that row back on green energy pledges, may ultimately be punished by currency and bond markets.
