Hopes for Interest Rate Cuts Resurface

by Warren Seah

U.S. bond yields witnessed a significant decline on Friday following the release of an October jobs report, indicating a softening in the labor market. This development resulted in a boost for shares of one of the largest Treasury exchange-traded funds.

The iShares 20+ Year Treasury Bond ETF TLT experienced a surge of up to 2.3% on Friday, benefiting from the retreat in longer duration Treasury yields. While it retraced some of its gains in afternoon trade, it still recorded a three-day increase of approximately 5.4%, its largest since Oct. 27, 2022, based on Dow Jones Market Data.

The central question raised on Friday revolved around whether the underwhelming jobs report signaled an economic slowdown that could potentially lead to more rate cuts by the Federal Reserve in 2024 than initially anticipated by Wall Street just days ago.

According to BeiChen Lin, an investment strategy analyst at Seattle-based Russell Investments, with approximately $292 billion in assets under management, this development suggests that the economy is exhibiting signs of weakness and that the Fed’s rate-hiking cycle might be coming to an end.

However, Lin also pointed out that Refinitiv data indicates a drop in expectations for the Fed’s interest rate target through 2024 on Friday, down to around 4.4% from the previous level slightly above 4.5% a few days ago.

Read: Fed’s Barkin says October data shows gradual cooling of job market

The Federal Reserve’s Policy Rates at a 22-Year High

Since July, the Federal Reserve has maintained its policy rates within a range of 5.25% to 5.5%, which is the highest it has been in 22 years. This decision was made in an attempt to combat the rising inflation, which had caused bond and stock prices to plummet. It’s worth noting that bond prices and yields move in opposite directions.

The Significance of Bonds

According to financial experts, bonds have become increasingly important in light of these developments. Lin, a renowned analyst, emphasized the significance of bonds, pointing out that the recent selloff led to the 10-year Treasury yield briefly reaching 5% in October. As a result, similar yields now appear quite attractive for long-term investors, especially if the Federal Reserve is compelled to significantly reduce rates.

Alex McGrath, Chief Investment Officer for NorthEnd Private Wealth, acknowledged this dramatic shift in yields, describing the 10-year Treasury yield at 5% as a “gale-force wind on valuations in the equity market.” However, he admitted that he is not currently rushing into long-dated bonds. Like many investors, McGrath prefers to stay in short-duration risk-free assets that yield approximately 5.5% to 6%. This is mainly due to the high volatility experienced since April.

Positive Momentum in the Stock Market

In spite of these circumstances, U.S. stocks, including SPX and DJIA, experienced an upward trend on Friday, setting them up for what appears to be the best week of the year. Meanwhile, the 10-year Treasury witnessed a significant decline of 15 basis points on the same day, bringing it down to 4.52%, as reported by FactSet.

Related: ‘T-bill and Chill’ Trade: Individual Investors Flocking In

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