Ice Cold Bonds Stoke the Stock Market Rally

From the Desk of Ian Culley @IanCulley

The Fed abides.

Three rate cuts remain the base case for 2024. Everyone had this scenario penciled in, including the bond market.

The US benchmark yield is holding at the same levels as last month. T-bonds are catching a modest bid. And bonds are…well, boring. 

Perhaps it’s not an ideal scenario for bond bears, but stock market bulls are welcoming the muted response…

The Bond Market Volatility Index $MOVE—the credit market’s equivalent to the VIX—is registering its lowest reading since spring 2022.

The last time the MOVE hit these levels, the Fed had yet to embark on its current hiking cycle. (We all know what followed—an epic downturn for bonds and stocks.)

But interest rate hikes seem irrelevant at this point. The conversation now revolves around cuts and how many we could expect by yearend.

It doesn’t matter whether we witness a cut later this summer or not. Investor positioning aligns with the Federal Reserve’s dot plot, decreasing bond market volatility. 

And few asset classes enjoy a drab bond market quite like stocks:

I highlighted the S&P 500 $SPY overlaid with the Move index (inverted) last December.

I joked that I wanted to short the MOVE, though it’s not tradeable. We aimed to buy stocks instead. 

So far, it’s working out fine, as SPY is hitting another new all-time high.

The other charts I highlighted in that mid-December post—the HYG/IEI ratio and the Fallen Angel ETF $ANGL—are also posting new highs.

Who knows how many times the Fed will cut this year, if at all? I don’t!

I don’t even know what I’m having for dinner tonight. (Hopefully, spaghetti or nood-noods, as my two-year-old says.)

Luckily, we don’t have to rely on Powell’s words or fall into the rate-cut trap.

We track the bond market. And it’s telling us to buy stocks.

What do you think?

Am I oversimplifying it?

Should the economic data and FOMC meeting come before price? 

-Ian

Countdown to FOMC

Following yesterday's FOMC meeting, the market has increased the probability of the first 25-basis-point rate cut in June from 54 to 63%.

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 March 21, 2024.

Thanks for reading.

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And as always, be sure to download this week’s Bond Report!