From the Desk of Ian Culley @IanCulley
High-yield bonds are printing fresh highs relative to US Treasuries – signs of a healthy risk appetite.
Bond market volatility is collapsing, allowing equities to take center stage.
And interest rates are trending lower since peaking last October.
But looking ahead to next month, we could see rates correct higher.
The US 10-year yield tends to rise in February – more so than any other month of the year except April:
It would make sense for this seasonal trend to continue.
The 10-year yield dropped more than 100 basis points during Q4 last year.
The Fed’s hiking cycle has desensitized many to the large swings in treasury yields. Nevertheless, that’s a significant move for the US benchmark.
A retracement in the coming weeks compliments a more prolonged decline over the coming months and quarters as yields don’t move in a straight line.
A near-term rise in the 10-year also fits with the recent US dollar strength.
So, how far will rates rise in the coming months?
The 4.25 area seems reasonable:
It coincides with the October 2022 peak and the 38.2% retracement of the recent decline.
The 10-year yield hovers roughly 15 basis points below that level today.
I want to give the US benchmark rate extra room to recover from last quarter’s decline, re-evaluating the intermediate downtrend if the 10-year rips above 4.50. It’s a run-of-the-mill correction until then.
February likely brings sideways action for all the major asset classes – stocks, bonds, and commodities. Don’t let the choppy action throw you off course.
The bond market continues to support a rally in US equities.
And I can’t think of anything more bullish for stocks than a fresh leg lower in US treasury yields.
Stay tuned.
Countdown to FOMC
The market is pricing in a pause in the hiking cycle next week with a 50-50 chance of a 25-basis-point cut in March.
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 January 26, 2024.
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