A Likely Landing Pad for Interest Rates

From the Desk of Ian Culley @IanCulley

JC asked me how far I thought interest rates would pull back during a recent internal meeting.

The question caught me off guard since I trade bonds, not interest rates. I know my bond trade targets off the top of my head, but not the corresponding rate levels. 

As soon as the call ended, I applied Fibonacci analysis to the 30- and 10-year yields…

The 3.50 level marks a logical area for the 30-year yield to stop falling.

That level coincides with a shelf of former lows and a critical retracement level covering the rally off the 2020 low.

The similar level for the 10-year yield stands at 3.25:

Whether rates pull back to these retracement levels is anyone’s guess. 

One thing is for certain: interest rates have plenty of room to fall. I wouldn’t be surprised if they slice through these areas if and when the Fed begins to cut rates.

Nevertheless, I still believe we witnessed a generational bottom in yields in 2020 – not a generational low in bonds in 2023. 

But we have to trade what's in front of us. 

Rates are coming off a historic rally as bonds and stocks catch higher. 

And from the looks of it, the coming year is shaping up to be a doozie for stock and bond market bulls.

Let the good times roll!

Countdown to FOMC

The market is pricing in a pause in the hiking cycle until March 2024 and two cuts before next summer.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of December 28, 2023.

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