Markets Now Pricing in Rate Hikes Through 2027 as Fed Cut Expectations Evaporate

Market expectations for Federal Reserve policy have shifted from the timing of cuts to the duration of holding rates steady, with the yield curve now pricing modest hikes through 2027. Treasury yields reflect this change, with the 10-year at 4.56% and the 30-year at 5.06% after a May 19 spike. Real yields have also risen, with the 10-year TIPS at 2.18% versus 1.91% on May 1. Financial conditions are tightening on a real basis. Inflation pressure is increasing due to oil tariffs and near-term AI cycle demand. Risk assets remain resilient, and fiscal demand for longer-duration bonds adds a premium, supporting higher longer-term yields.

"The second is resilience in risk assets. Equities have not cooperated with the textbook script that high real yields should crush multiples. The S&P 500 tracker ETFs are up significantly this year, with the index trading at a forward P/E of 21x. When growth refuses to roll over, the Fed has less reason to pivot. Third, the fiscal premium. Investors are demanding more to hold longer paper, full stop."

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