This 'toxic brew' is driving rates higher, says Societe Generales Subadra Rajappa

Summary

Subadra Rajappa, head of research at Societe Generale, joins Fast Money to discuss the bond market and rate outlook. She attributes the rise in yields to a toxic brew of oil-driven inflation, Fed inaction, rising inflation expectations, and fiscal deficits. She expects three Fed rate hikes and warns that a failure to deliver a fully priced hike could cause bond market volatility. She also sees a possible cap on long-end term premiums if the Fed hikes and warns of wider corporate bond spreads if yields rise sharply.

• Bond yields are rising due to oil, inflation, Fed inaction, and deficits.
• Subadra Rajappa expects three 25bp Fed rate hikes through March.
• She says the Fed almost has to deliver the fully priced hike to avoid bond volatility.
• A Fed hike could cap long-end term premium by showing inflation-fighting commitment.
• If the Fed does nothing, inflation expectations could become unhinged.
• A sharp yield rise could pressure risky assets and widen corporate bond spreads.
• Heavy corporate bond issuance must be absorbed at higher absolute yields.
• Tim earlier said oil could go to $90 and stay, not back to $70.