Rate Cut Expectations Drive Historic Bond Rally: How Long Can It Last?
Investors are increasing their collective bets that the Federal Reserve will soon start cutting interest rates – a bet that went into overdrive this week and ignited the strongest rally in bonds in 40 years.
“The Bloomberg US Aggregate bond index, a widely tracked measure of total returns on US fixed income, has risen 4.3 percent so far in November, putting it on course for its best monthly showing since 1985,” the Financial Times reports.
A key news event that helped fuel the rally: comments from Fed Governor Waller on Tuesday.
“I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to [the Fed’s target of] 2 percent,” he said.
“If we see disinflation continuing for several more months — I don’t know how long that might be, three months, four months, five months you could then start lowering the policy rate just because inflation’s lower. There’s just no reason to say you would keep [rates] really high and inflation is back at target, for example.”
The policy-sensitive 2-year US Treasury yield has fallen sharply in recent trading sessions, dropping to 4.64% on Wednesday (Nov. 29), the lowest since July.
Notably, the 2-year rate is now falling rapidly relative to the current 5.25%-to-5.50% target range for the Fed funds rates. That’s a signal that the market’s pricing in higher odds that 1) rates have peaked and 2) cuts are near.
Comparing US monetary conditions against consumer inflation and unemployment suggests that policy is close to the tightest it’s been in recent hiking cycles.
Additional support for expecting that interest rates have peaked: recent estimates of the “fair value” for the benchmark 10-year Treasury yield have been well below the current
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