Who's right? The Federal Reserve or the Bond Vigilantes?

I think that the era of "Easy Money" is drawing to a close. The signs are pretty clear

• The Federal Reserve hiked interest rates 1.5% during the last 2 years
• The ECB dropped the language that they will increase asset purchases in future
• the BoE revisited its forecasts and now they think they will increase rates at a faster pace

We would then expect the Bond Markets, especially in the US, to show a steeper Yield Curve, but this is not the case at the moment.

The chart below provided by Bloomberg  compare the Dot-Plot, i.e the expectation of the Federal Reserve members (Blue Line) against the expectation from the Bond Market (red line)

My concern is that the Bond Market is underestimating the Federal Reserve. If long duration bonds will have to adjust to the Fed Estimation, the price decrease on those bonds will be big.

This could be a problem for Stocks/Bonds Portfolios. Usually in periods of high volatility the bond side of an investor portfolio provides protection. Here the risk is that also the Bond side of a portfolio could lose money. 

We are living in very uncertain times and I think many investors are underestimating the impact that the De-Leveraging of the Federal Reserve will have on 5 Years Yield and above.

We have to remember that the Federal Reserve bought 4.5 Trillion USD after the Great Recession (the so called Quantitative Easing Program). Now that they are not buying any more Treasuries, MBS and other securities either other investor will step in or, based on the laws of Supply and Demand, interest rates will have to go up.

Please take a look on Exhibit 2, provided by Bloomberg and Janus Henderson Investors that shows the De-Leveraging Plan of the Federal Reserve.

The US Government will have to fund their deficit without the Fire Power from the Federal Reserve so the risk that Interest Rates may rise more than expected has, in my opinion, an higher probability than what the market is expecting.