Why interest rates may not go the way you think they will if the Fed gets too aggressive


Traders in the 10-year bond options pit at the Chicago Board of Trade signal orders.
Frank Polich | Reuters

Markets are all ready for an interest rate hike and could even take three in stride this year, but what's not quite priced in is if the Fed gets more ambitious.

Fed watchers say there's a risk central bank officials could change their interest rate forecasts when they meet this week, and if enough of them do it, the Fed could be pointing to four rate hikes this year instead of three. The Fed releases its interest rate outlook, known as the "dot plot,'" at 2 p.m. ET Wednesday, along with its statement.

Strategists agree, if the Fed were to up the ante on rate increases, the first move would be higher for yields across the Treasury curve. The 10-year could even spike to the 2.70 percent level, a two-year high.

But the next move may not be that obvious.

"If the stock market didn't like it, the 10-year would do well," said David Ader, chief macro strategist at Informa Financial Intelligence. Yields move inversely to price, so rates go lower when prices move higher. A stock market sell-off of any significance is seen as bullish news for bonds.

"You have oversold technicals and you're saying the Fed wants to do more ... that would be the Fed looking for four hikes and we're dealing with 1 percent GDP. After the initial shock, that would stall the sell-off in Treasurys," he said.