Where are interest rates going this year? A lot higher

How high will interest rates go this year? To record levels

If you are wondering where interest rates (NASDAQ: IEF) are going this year or how high they might go the best answers we can give is a lot higher. Not only is the FOMC poised to begin aggressively hiking rates this week but the fundamental conditions driving their actions are gaining momentum. The latest CPI data was well above expectations, underpinned by rising oil prices, and there is no end to the rise in oil prices that we can see. The energy market is so constrained the next hit to production, output, future capacity, or storage levels will send it through the roof.

Our conservative estimate for WTI (NYMARKET: USO)  is a fresh all-time high before mid-summer. Throw in a hurricane or some other disruption and we see WTI moving up into the $150 range or higher, pushing gasoline well above $6 nationally. The takeaway is that fuel is a highly-levered driver of inflation, fuel prices are at record levels and rising, and the impact of that on inflation is only beginning to be felt. This means the “aggressive” stance taken by the FOMC is most likely too cautious and even more aggressive actions are likely. As it is now, the FOMC target rate is expected to hit 3% by the end of the year, fully 225 bps higher than it is now, and there is a very great risk it will top 5% in reality.

The ten-year treasury is about to break out

The Ten-Year Treasury is moving up on the FOMC expectation and on the verge of a major breakout. The yield on the TNX moved about 3.0% and reached a multi-year high following the CPI data and is now just beneath a very key resistance point. This resistance point is near the 3.25% level which was a point of resistance before the pandemic set in. With the FOMC set to hike rates to above 3.25% already, we see nowhere for the ten-year yield to go from here but higher.

Assuming the FOMC only hikes rates to 3.25% this year the yield on the ten-year will most likely hit 5% or greater by the end of the year. On a technical basis, a break above 3.25% would bring a target near 6.0% into play. Assuming inflation continues to run hot and the Fed ups the pace, the yield on the ten-year could go well into the high-single-digit range where it has not been in over 20 years. And that is this year. Inflation isn’t expected to subside meaningfully until 2024 which means FOMC rate hikes could keep the TNX moving higher for the next few years.

Mortgage rates are on track to hit 10%

Mortgage rates are rising on the back of the FOMC expectation as well. The cost of a mortgage more than doubled to over 5.0% just a month ago and is now on track to top 6% nationally. With the FOMC on pace to hike rates to over 3.0% by the end of the year, the cost of a mortgage could hit double-digits by December. The only ray of light is that rising rates are killing demand which may keep rates from hitting their highest potential. The takeaway here, however, is that buying a house is only becoming more expensive and that will keep current homeowners from moving and new ones from buying. In this scenario, a housing market correction can be expected and it may take a while to play out. The builders may be able to boost inventory, but it won’t matter if no one is buying.