Long-term interest rates have disconnected from Fed expectations, and a simple model of the relationship shows that 10-year rates are now 40 basis points higher than what Fed expectations would have predicted, see chart below.
The rise in long rates above and beyond what has happened with Fed expectations is consistent with the observed increase in both the New York Fed’s measure of the term premium and the San Francisco Fed’s measure of the term premium.
The worry in markets is that the additional premium in long-term interest rates is driven by fears about fiscal sustainability.
Source: Haver Analytics, Bloomberg, Apollo Chief Economist
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