The March low at 4.038% is holding somewhat for now. But looking at things, it’s all about the 4% mark from a psychological perspective when it comes to 10-year yields. That especially after the Fed more or less sealed the deal for a September rate cut yesterday.
The move lower over the last few months owes to a couple of factors. For one, US inflation data has been getting better at the margin. The disinflation process may be gradual but the Fed is slowly gaining more confidence that they are on the right side of the fight, at least for now.
Taking that into consideration, markets have also moved to price in higher odds of a Fed rate cut for the months ahead. We went from roughly between one to two rate cuts to now potentially being three rate cuts for the Fed by the end of this year. September remains fully priced in as before the July meeting. But there’s ~72 bps of rate cuts priced in by the December meeting now.
The general line of thinking is that once the Fed goes, there’s an inclination to believe that they can keep going as the inflation monster continues to die down and the economy navigates a soft landing scenario.
Going back to the bond market, yields have been stuck in a bit of a pattern since May already. That is one of lower highs, lower lows as seen above. And the Fed pretty much rebuffed that by not pushing back against the market pricing.
It looks like bond bulls are finally getting their wish, not least after having endured quite a bit of pain for most of 2023.
This article was written by Justin Low at www.forexlive.com.
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