The Right Position To Take
The Signs Are There
While investors seem convinced that we’re still on track for the soft or no landing outcome, they are also continuing to dial back their most optimistic projections. The 10-year Treasury yield moved back up to its highest level since December as the market gives up on the idea of a March rate cut and slowly starts to expect a less aggressive Fed in 2024. It’s probably the right position to take, although I think the bond market is still being a bit too aggressive in expecting 5 cuts this year.
As it stands right now, the combination of high GDP growth, low unemployment and elevated inflation doesn’t warrant a significant rate cutting cycle, but a slow normalization away from where policy was at when inflation was 9% seems reasonable. Looking at the chart, short-term Treasury yields never really seemed to buy into the idea that a March cut was in play. The 3-month yield tends to move lower in advance of a likely rate cut, generally in line with the Fed Funds rate. That yield is still about 15 basis points above it, which means we likely see at least a modest Treasury bill rally ahead of a cut. That hasn’t happened yet.
