Epic Treasury rally may be running out of fuel as Fed pivot priced in
By David Randall
NEW YORK (Reuters) -A surge in U.S. government bonds has helped lift stocks and heightened investors’ appetite for risk. Now some are betting that further gains may be harder to come by unless the economy severely weakens, potentially upsetting the narrative of resilient growth that has propelled markets.
An unexpected dovish pivot from the Federal Reserve earlier this week turbocharged the rally in Treasuries, sending benchmark 10-year yields to their lowest level since July. Yields, which move inversely to bond prices, now stand at 3.93%, some 110 basis points from a 16-year high hit in October.
The tumble in Treasury yields has rippled far beyond the bond market as it pulled down rates on mortgages, eased financial conditions and pushed investors into stocks and other risky investments. The S&P 500 is up nearly 15% since its October lows and has risen nearly 23% this year, putting it within striking distance of a record high.
Some investors, however, believe much of the dovish shift from the Fed may already be reflected in Treasury prices. Deeper cuts, they say, would be more likely if a rapidly slowing economy forced the Fed to accelerate its easing — an outcome that would run counter to the “soft landing” outlook that has buoyed stocks in recent months.
«The market is pretty perfectly priced for a soft landing,» said Stephen Bartolini, said lead portfolio manager of the U.S. Core Bond Strategy at T. Rowe Price. «The bulk of the move lower is complete and if we were to push yields from here it would have to be due to expectations that the economy is slipping into recession.»
The Fed’s new projections — published on Wednesday — pencil in a median 75 basis points of cuts next year, taking the fed
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