Image Source: PixabayWhile the Fed didn’t cut rates at its December policy meeting, the way the money and bond markets have reacted post-FOMC, one could be forgiven for thinking the rate cuts had already begun. Indeed, most Treasury (UST) yields, especially along the coupon curve, have fallen in a rather noteworthy fashion over the last few trading sessions, as “rate cut euphoria” seems to have taken hold. However, New York Fed President John Williams (a spokesperson for official Fed policy) interestingly pushed back on this recent market movement. He noted that “we aren’t really talking about rate cuts” and that it is “premature” to think about the March 2024 FOMC meeting as the starting date for cutting rates. Ultimately, upcoming economic and inflation data will determine the timing and magnitude of rate cuts, and that will create uncertainty and volatility in the UST market. That being said, we are of the mindset that rate cuts are coming in 2024; it’s just a matter of when and by how much. Against this backdrop, we offer two fixed-income solutions for navigating what will likely lie ahead for bond investors in the coming year from both an offense and defense perspective:
Correlation of SHAG, UST 2-Year Yield and Fed Funds Target Midpoint
U.S. Treasury YieldsConclusionOnce again, one can make the case that the UST market has already priced in a lot of good news, so in order to maintain yields at current levels (or even lower), validation will be necessary. In other words, future economic and labor market data need to reveal a visible slowing in growth, while inflation must continue to show signs of further cooling. These two forces will be necessary for the Fed to begin its process toward rate cuts.
Important Risks Related to this ArticleSHAG: There are risks associated with investing, including possible loss of principal. Fixed-income investments are subject to interest rate risk; their value will normally decline as interest rates rise. Fixed-income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Investing in mortgage- and asset-backed securities involves interest rate, credit, valuation, extension, and liquidity risks and the risk that payments on the underlying assets are delayed, prepaid, subordinated, or defaulted on. Due to the investment strategy of the Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.USFR: There are risks associated with investing, including possible loss of principal. Securities with floating rates can be less sensitive to interest rate changes than securities with fixed interest rates but may decline in value. Fixed-income securities will normally decline in value as interest rates rise. The value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.More By This Author:Behind The Markets: Looking At New Economy Real Estate In December 2023
Fed Watch: Pivot, Pivot
60/40 Returns: Correlation Is Not Causation