WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
ARCHIVE: November 20, 2023
Did the Fed Cut Rates Without Telling Anyone?
The financial markets appear to be rather confident the Fed has finally finished raising rates in this tightening cycle. We certainly have no argument with this sentiment and have been emphasizing that Powell & Co. were either at or close to the end of this rate hike cycle for months now. However, the pendulum seems to have shifted rather quickly to rate cuts, and given the recent trading activity in the money and bond markets, one could be excused for thinking the Fed may have cut rates already but didn’t let anybody in on it.
What we find interesting about these recent developments is that Fed officials had recently been espousing the notion that the run-up in Treasury yields was “doing the work” for them in terms of additional firming in monetary policy. With essentially the entire Treasury yield curve trading at, near or even above the 5% threshold, investors seemed to agree with this reasoning. In fact, the Federal Open Market Committee (FOMC) itself elevated tighter financial conditions as a key monetary policy input at the November FOMC meeting.
However, since the November Fed gathering, there’s been a rather noticeable shift in the open market interest rate setting, specifically as it relates to Treasuries. Indeed, all along the coupon curve, investors have witnessed a stunning reversal in rate developments.
Let’s start with the UST 2-Year note, as this maturity will be more directly related to both the current Fed Funds Rate and expectations for the months ahead. The yield here dropped at one point by about 40 basis points (bps), bringing the reading to its lowest point in more than three months. Of course, the lion’s share of attention is reserved for the UST 10-Year note. After flirting with the 5% threshold around mid-October, the yield has now plummeted by 55 bps, residing below 4.50% as of this writing. This decline has brought the 10-Year yield to the level that was being printed around the September FOMC meeting.
In other words, the tightening in financial conditions that was thought to have been spearheaded by the dramatic increase in Treasury yields has now been basically reversed. In addition, U.S. corporate bond spreads have also narrowed from their recent highs. Given the rhetoric the markets heard from the Fed Chairman and other Fed officials about the rise in Treasury yields, it will be interesting to see if, or when, they acknowledge the noteworthy decline in rates.
So, if the September/October increase in rates was viewed as being akin to a rate hike, if not two, then doesn’t it stand to reason that the post-November Fed meeting decline should be viewed as a rate cut of sorts?
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