Bond yields typically rise, meaning their value falls, after the first Fed hike of a cycle.

If the Federal Reserve hikes interest rates in an effort to slow down the rapid rise in longer-term bonds yields, history shows it probably won't be a success.

The surge in bond yields BX:TMUBMUSD10Y, which has coincided with a new blast higher in oil prices (CL00) on worries over Middle Eastern oil supplies, has emerged as a major concern, even as core CPI on a year-over-year basis fell to its lowest reading since early 2021 in August.

Citi's global equity strategy team led by David Groman plotted the course of 10-year yields around first Fed hikes. With the notable exception of 1997 - when the Fed hiked once, went on hold, and then cut rates the following year due to contagion from the Asian financial crisis - the pattern is for yields to rise about 50 to 100 basis points in the year after the first Fed hike.

The pattern of 10-year yields after the first Fed hike

"While stocks tend to wobble around the first hike, it has typically paid to buy into any volatility with a one-year horizon. The same can't be said for bonds, where it has generally paid to sell U.S. Treasuries," they said.

Former Fed governor and ex-Trump White House official Stephen Miran has been arguing, both on CNBC and on social media, that a hike would be counterproductive.

"With term premia and inflation expectations well behaved, the move higher in long yields has been a result of improved growth expectations, i.e. a good increase in yields rather than a bad increase in yields, and not one that needs to be fought (other than in the sense of smoothing volatility as Treasury is doing through buyback liquidity)," he wrote.

"Moreover, even if one views 'controlling the long end' as a valid goal for monetary policy, hiking in this environment will be counterproductive as a) an increase in short-term funding costs is only going to be passed through and raise long yields given the shifting buyer base for Treasurys; b) history doesn't really show that long yields come down with Fed hikes; and c) the incoherence of the reaction function will, when the dust settles and after initial reactions, lead to higher and not lower risk premia," Miran added.

Citrini's James Van Geelen, in a Substack message, said a hike would help longer-duration government bonds.

"The hike should team fears for the long end and prevent rate [volatility] from continuing to rise," he wrote. "As I see it, [an increase] won't have too much impact on the real economy unless we see a genuine tightening cycle emerge that takes fed funds back to cycle highs."

He compared the stock-market set-up to the dot-com boom. "The majority of the last year of the dot-com bubble saw the Fed hiking rates to combat inflation, but it was also the most violent increase in equity prices of the entire cycle," he said.

The S&P 500 SPX retreated on Monday and Tuesday, but stock-market futures (ES00) advanced ahead of Wednesday's decision.

-Steve Goldstein