Bond Rout Will Push Fed to Tighten

Endgame

So what happens next? "The endgame is already under way," says Jim Bianco, president of Bianco Research. Bianco says the Fed is no longer treading the middle ground that all good central banks must tread, which is to foster consistent growth while avoiding excessive looseness or tightness in monetary policy. He says the federal funds futures market is predicting that the Fed will hike rates in February or March next year.

Greenspan is now in a bind. He could win back the bond market by trying to convince that there is enough weakness in the economy to soak up monetary stimulus. But the bond market probably wouldn't believe him now. A whole host of economic statistics says an economic recovery is under way, including a much higher-than-expected GDP growth figure for the second quarter.

The only thing the bond market will now believe is a hike in rates. The longer the Fed waits, the bigger it will have to be.