Bond market begins sizing up potential 2024 Fed rate cuts

Wall Street strategists and the bond market are both pricing in 2024 interest rate cuts by the Federal Reserve. Yahoo Finance's Jared Blikre examines forecasts for the 10-year Treasury yield (^TNX) next year as global central banks plan to adjust their own monetary policies.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

This post was written by Luke Carberry Mogan.

Video Transcript

[AUDIO LOGO] BRAD SMITH: The debate over the trajectory of the bond market rages on.

Treasury yields dipped after the Fed's announcement last week, with investors betting on a rate cut next year and perhaps multiple rate cuts.

So where does the street see yields heading in 2024?

For more on this, we've got Yahoo Finance's reporter, Jared Blikre, standing by.

JARED BLIKRE: Thank you, Brad.

2024 bond predictions, this is what gets my juices flowing here.

I'm taking a look at the 10-year T-note yield, which is currently at 3.9%.

It has fallen from 4% or excuse me 5%.

That is a huge drop.

And a lot of the bullishness that we're seeing in the market that culminated with last week's Fed pivot, a lot of this is baked in.

And here's what Wall Street is thinking about the 10-year and where it's going to fall at the end of 2024, so one year.

TD Ameritrade thinks it's going to fall 100 basis points.

So basically 2.9%, sub 3%.

That would be a huge move.

We see BMO Capital Markets about half of that.

And then we see some-- some forecasts for an increase in the 10-year.

Bank of America and Barclays, those are the two biggest.

Barclays looks like it's about 40 basis points higher.

So that'd be about 4.3% right now.

But this is the long end.

And when we're talking about Federal Reserve policy, we got to talk about the short end because that's where the rate cuts happen.

The long end tends to follow.

Here we have this top line.

This is the number of rate cuts and where the benchmark was expected to be on October 31.

That was about seven weeks ago.

Since then, that forecast that goes through January of 2025 has dropped precipitously.

So expectant-- so market participants are expecting a lower terminal rate for the Federal Reserve at the end of this year, at the beginning of 2025.

And this is pricing in almost seven.

It's about 6 and 1/2 rate cuts.

And the problem with all of this, 6 and 1/2 rate cuts, that's not a soft landing.

If the Fed has to cut 6 times, much less 8 or 10 times as some market participants are forecasting, well, that's an entirely different matter because the Fed is reacting to bad data, and it's trying to get from behind the eight ball here.

Let me show you another chart.

This is Powell's biggest problem right here.

Fed Chair, Powell, after his big pivot, he's still banking on inflation coming down to 2%.

But some of the key metrics here are stalling out.

This is rent of shelter in Scion and core services ex housing.

These are both three month annualized.

And you don't have to pay attention to the whole chart.

All I want people to focus on is right here.

They are moving slightly up, and they are still above 5%.

That is a huge level, and that takes a lot of work to get them back below 2%.

Now let me show you another chart.

These are global central bank policy rates.

We have the US Federal Reserve.

This is a trajectory.

This goes back to the global financial crisis by the way.

The Fed has the highest rate right here, 5% and change.

Then we have the ECB.

That's a little bit lower.

And then Bank of Japan all the way down here still in negative territory, -0.1%.

And I bring this up because to little fanfare, the Bank of Japan had a meeting last night, Uber, Uber dovish.

The yen weakened by the most in about a month or two months.

And I think the message to everybody around the world is that the convergence.

And there should be a convergence of these rates, can happen in two different ways.

The bank of Japan could raise their rates, or they could just bank on the Fed and the ECB cutting their rates.

And that seems to be what everybody's counting on, the Fed cutting rates next year, and the ECB following.

And that should, I guess in theory, align everything, investor interests and prevent a disorderly unwind of the global bond market.

And given the Bank of Japan's outsized influence, so much ownership of their local bond market, that is a distinct possibility.

So all of this is to say that when there's a huge number of disagreements, and I'll go back to this initial chart right here.

When you have such differing views on where the tenure is going to land next year given the fact that we just had a pivot, things are up in the air right now.

I would say this is peak dovishness right now for the Federal Reserve.

And if inflation ticks up even by a little bit, they're going to have to backtrack and the market is going to reprice that risk very violently.

So if it all works out, if we have a soft landing, probably going to be two or three rate cuts next year, but it's not going to be six or eight.

The market can't have it both ways.

SEANA SMITH: And the market's running with some of that optimism, with what they are pricing and the aggressive price cuts or rate cuts there.

Jared Blikre, as always, thanks so much for breaking that down for us.