Fed Cuts Rates, Yields Explode Higher? — Evening Brief – 10.23.24
The U.S. 10-year Treasury yield has surged more than 60 basis points over the past five weeks to over 4.25% as of Wednesday, its highest level since late July, despite the Federal Reserve’s aggressive 50-basis point interest rate cut last month, prompting new apprehensions regarding the downtrend that began in October 2023.
The 10-year yield is trading above its 200-day moving average, something not seen since early July, while the MOVE Index, a reflection of the level of volatility in U.S. Treasury futures, is trading at its highest level since December 2023 at 129, a 40% surge in less than a month.
In a coordinated attempt to sustain the dovish narrative, several FOMC members this week proposed “gradual” and “modest” interest rate reductions. At the moment, Fed funds futures agree with their view. The market is pricing in an 88% probability for a 25-basis point cut at the next meeting on November 7 and a 67% probability for another 25-basis point cut at the December 18 meeting.
The U.S. 2-year Treasury yield, a gauge of policy expectations, continues to align with the market’s view of a lower Fed funds target rate. The yield currently sits at 4.06%, far below the target range of 4.75% to 5.0%, indicating that the market anticipates further interest rate reductions.
Nonetheless, like the remainder of the yield curve, the U.S. 2-year yield has surged significantly in recent weeks. In late September, the yield was nearing 3.50% and is currently over 50 basis points higher. The market continues to reflect a robust estimate for rate cuts, although it may be time to reduce that level of conviction.
The surge in Treasury yields is being driven by more than just doubts about interest rate cuts, according to some analysts. “With less than two weeks now until the U.S. elections, concerns about the fiscal outlook and its potential upward pressure on inflation have become more acute,” said Robert Dishner, senior portfolio manager at Neuberger Berman.
Meanwhile, there is increased concern that the economy’s recent resilience eliminates the need for further rate cuts. “The rise in the 10-year yield is causing confusion that maybe the economy is growing too rapidly, and that employment remains too resilient,” said Sam Stovall, chief investment strategist at CFRA Research. “As a result, the Fed might end up being slower to lower interest rates.”
Meanwhile, Bryan Jordan, chief strategist at Cycle Framework Insights, Inc., told Connect Money that we shouldn’t get too worked up about the rise in yields. “It’s not unusual for long-term yields to rise for a time during Fed easing cycles, especially when the market has already priced in aggressive rate cuts.”
“The overarching trajectory across virtually all of these periods has been to the downside, however, a pattern that is a good bet to repeat in this cycle should the longstanding signal coming from the leading indicators come to fruition,” he said.