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Two weeks ago, Wall Street seriously doubted the Fed would raise rates at its March meeting. The skepticism is a matter of public record (see for yourself). The market expects that line of thinking will prove wrong, as Hedgeye CEO Keith McCullough noted today on The Macro Show:

“A lot of people said ‘Well, the Fed’s not going to raise rates.’ Two weeks ago, the market implied a 34% probability that the Fed raises rates. You know what that probability is this morning? 96%.”

Why the sudden change?

For starters, the regional Fed heads made the rounds with TV talking heads last week, which was later interpreted as lobbying for hawkish monetary policy.

Here’s a round-up of some of the comments:

  • "The case for monetary policy tightening has become a lot more compelling," New York Fed President William Dudley told CNN last week. "After the election we've seen very large increases in household and business confidence, we've seen very buoyant financial markets."
  • "In my view, a rate increase is very much on the table for serious consideration at our March meeting," San Francisco Fed President John Williams said in a speech last week. “The aim is to keep the economic expansion on sound footing — not too hot, not too cold — that can be sustained for as long as possible.”
  • "I see three hikes as appropriate for 2017, assuming things stay on track," Philadelphia Fed President Patrick Harker said in prepared remarks at Temple University last week.

Chief Fed head Janet Yellen joined the party last Friday saying, “Indeed, at our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate." (emphasis added)

The 10-year Treasury yield went from 2.35% to 2.51% on the rate hike speculation. We’ve been advising investors to sell Long-Term Bonds (TLT) for some time now, since the U.S. economy is heating up (click here for more).

What could push long-term bond yields even higher? A strong jobs report, McCullough says. Last month was the first year-over-year jobs growth in 23-months.

“If we were to see another acceleration in nonfarm payroll growth I think you could see the 10-year tap 2.55% or higher.”