Fed Rate Hike Sparks Expectations of Higher Bond Yields

The Federal Reserve is set to raise interest rates for the first time since July 2023, and markets are bracing for a widely expected rate hike on Wednesday.

Traders expect the Fed to increase rates by a quarter of a percentage point to a range of 3.75% to 4%, which could start a hiking cycle that weighs on stocks in the near term.

Bond yields tend to rise during rate hike cycles, with only one exception since 2004. According to Deutsche Bank, most hiking cycles move 10-year U.S. Treasury yields by an average of about 1.14 percentage points one year after the start of a cycle.

Deutsche Bank's global head of macro research, Jim Reid, expects this hiking cycle to be less aggressive than in past years, which could result in bond yields rising by as little as seven-tenths of a percentage point.