The bond market is selling off as traders reassess their forecasts about Federal Reserve interest rate cuts.
As U.S. economic growth holds up better than expected, markets have started to dial back expectations for rate cuts and yields have been rising across curve; bond markets around world following lead of U.S. Treasuries
@SPDJIndices pic.twitter.com/2PMxi4jfDb— Liz Ann Sonders (@LizAnnSonders) October 22, 2024
Strong economic data and the potential for a Trump election victory have contributed to higher interest rates, changing the outlook for bond yields. Last month, the Federal Reserve, led by Chairman Jerome Powell, made a significant 50 basis point rate cut.
However, subsequent strong economic indicators have diminished expectations of further aggressive cuts. As a result, bond yields have risen sharply.
October Philly Fed Services index up to +6 vs. +4.1 est. & -6.1 prior … strongest reading since May 2022 pic.twitter.com/H1uGvdKtsT
— Liz Ann Sonders (@LizAnnSonders) October 22, 2024
On Tuesday, the 10-year US Treasury yield jumped to 4.22%, its highest level since July, up from 3.62% in mid-September.
While far from the only influence, interest rate developments can—and do—impact currency moves. This appears to have been the case for the last few months, with US government bond yields and the dollar index moving first down and then up.
#economy #markets #currency… pic.twitter.com/CjEY6i6jfz— Mohamed A. El-Erian (@elerianm) October 23, 2024
This increase in yields has led to a decrease in bond prices, with the Bloomberg Aggregate Bond Index dropping 3% since mid-September. Long-term treasuries, as measured by the iShares 20+ Year Treasury Bond ETF, have fallen by about 9%. Several pieces of economic data have affected market sentiment.
A robust September jobs report indicated an addition of 254,000 jobs, negating the likelihood of another 50 basis point rate cut. Other factors, such as solid retail sales and slightly higher-than-expected inflation, along with the Atlanta Fed’s forecast of 3.4% GDP growth in the third quarter, have led traders to reconsider their expectations for future Fed policy moves.
Bond yields surge amidst economic data
Apollo chief economist Torsten Sløk recently noted that the Federal Open Market Committee might “reverse course” and maintain current interest rates in their upcoming meeting. Sløk emphasized the importance of the upcoming October jobs report as a critical indicator. “If the nonfarm payrolls report shows 150,000 to 200,000 new jobs, the Fed might have to hold its rates steady,” he said.
Federal Reserve officials have indicated a cautious approach. San Francisco Fed President Mary Daly remarked, “So far, I haven’t seen any information that would suggest we wouldn’t continue to reduce the interest rate.”
Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan echoed similar sentiments, indicating expectations of modest and gradual cuts. Market analysts are also watching the potential implications of a Trump victory next month.
Trump’s proposed policy of universal tariffs is seen as potentially inflationary. While Trump argues that tariffs would reduce costs, many economists warn they could lead to higher prices for consumers. If inflation rises again, it could prompt the Fed to halt rate cuts or even raise rates to counteract the inflationary pressure.
Capital Economics mentioned, “Should Trump re-take the White House in November, the dollar would probably rally sharply, at least in the near term, on expectations of higher US tariffs and interest rates.”
Evolving economic data and market speculation about the Federal Reserve’s next moves have led to a volatile bond market. Investors are closely monitoring upcoming economic reports and political developments for further clues on the direction of interest rates.
