The yield on the 10-year Treasury, which moves inversely to prices, has dropped to 4.15%, down 87 basis points from a 16-year high reached in October. This decline is attributed to the belief that decreasing inflation will prompt the Fed to cut rates as early as March 2024, a more dovish timeline than previously anticipated.
Investors are currently pricing in 126 basis points in rate cuts for the next year. The drop in Treasury yields has triggered a widespread market upswing, boosting various assets, including bitcoin, which has reached its highest point since April 2022, and Cathie Wood’s Ark Innovation ETF, known for speculative stocks, recording a notable 31.4% increase in November alone.
Despite these positive market movements, some investors caution that Treasuries may have rallied too quickly, and expectations for Fed cuts might be premature.
Concerns include the possibility of the Fed acting too soon and triggering an inflationary rebound reminiscent of the 1970s. Some argue that the rallies in both stocks and bonds may have eased financial conditions, potentially paving the way for a resurgence of inflation.
Tony Rodriguez, head of fixed income strategy at Nuveen, warns that the market might be overly optimistic about inflation and overlooks the potential for the Fed to take more aggressive measures. Employment data due on [12.8.2023] could influence short-term yield trajectories, with a strong number supporting the case for maintaining current interest rates for longer.
Fed Chairman Jerome Powell has committed to not cutting rates until inflation convincingly approaches 2%, learning from the 1970s experience where premature policy easing led to entrenched higher inflation and recession. This led to a situation where increased inflation became deeply ingrained, compelling those who followed to implement stringent monetary measures, ultimately causing an economic downturn.
George Bory, chief investment strategist for fixed income at Allspring Global Investments, believes investors underestimate policymakers’ determination to avoid repeating past mistakes. His firm has adopted a more neutral bond positioning after the recent rapid rally, which he views as excessive.
The Fed is expected to outline its rate expectations for the coming year and beyond at its next monetary policy meeting concluding on December 13, and analysts anticipate no changes in rates this month.
Greg Whiteley, a portfolio manager at DoubleLine Group, expresses skepticism about the market’s interpretation of the Fed’s intentions, emphasizing that the market has been wrong about Treasury yields multiple times in recent years. There are concerns that easing financial conditions could set the stage for a rebound in consumer prices, as reflected in the Goldman Sachs Financial Conditions Index’s decline.
Despite these reservations, some investors see further upside in Treasuries. Emily Roland, co-chief investment strategist at John Hancock Investment Management, suggests that ongoing softening in the labor market could drive both inflation and Treasury yields lower. Historical data from John Hancock indicates that 10-year yields typically fall by an average of 0.9% in the six months following the last rate hike of the cycle, implying potential for further yield declines.
According to Investing.com
By. Pham Thanh Bien
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