US | Strong bond rally on growing expectations of rate cuts in 2024

Summary

Following a less hawkish tone from Chair Powell in his press conference early this month, the yield curve now suggests a potential turning point has been reached, reflecting investors’ belief that the Fed is done raising rates and growing expectations of rate cuts in 2024.

Key points

• Key points:
• The drop in long-term yields is driven by growing confidence that the Fed is done raising rates, while lower uncertainty on the fed funds rate path has brought down the term-premium.
• Futures are now fully pricing a 25bp rate cut by the Fed’s May meeting, a notable change from October, when it was thought that there was no chance of a rate cut in the first half of 2024.
• Easier financial conditions increase the risk that the Fed might attempt to bolster rates along the yield curve in December signaling that the door for rate cuts is unlikely to open soon.
• The median professional forecaster revised up its 10-year Treasury yield projection, but the recent fall in the term premium suggests the reaction was likely somewhat exaggerated.
• It continues to be noteworthy that corporate spreads do not seem to indicate a potential credit crunch on the horizon despite an environment of tight financial conditions.

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