After September's Fed policy meeting, the dot plot, which is not an official policy tool, pointed to the members moving to a much more dovish view of future rate rises compared to earlier forecasts. But analysts are warning that investors are still at risk of being caught out by the pace of rate rises next year, particularly in U.S. government bonds and the dollar.
Global chief investment officer of fixed income at HSBC asset management, Xavier Baraton, said as the Fed is gearing up to normalise interest rates, real yields (or yields after inflation) have been factored and are likely to go above the 1 percent bar. This translates to closer to 3 percent rather than 2.25 percent yield on 10-year U.S. Treasurys.
"It leaves us very cautious on U.S. rates as a result. Especially as the rate hikes are not necessarily priced in next year, not enough or very few of them," Baraton said in an investment update call with clients and journalists.
"The market is behind the curve or a little bit complacent. They think the Fed will stick to a very slow place and our view is that as headline inflation bounces back in the first half of 2016 as a result of the base effect of energy prices, we could also see wages and core inflation creep up even more visibly," he said.
This will leave the Fed a little more exposed and the U.S. curve more vulnerable with a particular impact on intermediate maturities, or 3-10 year bonds, he added.