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.)
The only real safe haven out there continues to be the US Dollar.
That's it.
When money flows into the Dollar, stocks are under pressure. You may not always see it at the index level, but you can certainly see it when you count and go one by one across the stock market.
The US Dollar bottomed on December 27th. That was also the day that the Advance-Decline line on the NYSE put in its top. It was also the day that the Russell2000 Small-cap Index peaked.
Whenever a fellow parent asks what I do, I tell them I comment on interest rates.
I’m not involved in the semiconductor industry or the AI revolution. I don’t rob community banks (a personal favorite, despite mixed reactions). And I certainly do not analyze fixed-income, forex, and commodity markets (that’s a show-stopper).
The only thing people want to know these days – whether they’re navigating Wall St. or Main St. – is where rates are headed.
But no one seems to be listening to the one person who has a direct impact on the direction of US Treasury yields…
The FOMC stuck to its script this week, kicking the can and keeping rates steady.
Everyone was expecting the news. But the market wasn’t expecting Fed Chairman Jerome Powell (the man, the myth, the legend) to completely dash its hopes of a March cut.
Strangely enough, rates continue to fall on the news – even as markets adjust to the possibility of the initial rate cut now coming in May.
Before you run out to buy US treasury bonds, check out the overlay chart of the US 2- and 30-year yields:
There’s a big difference.
The 2-year yield is churning sideways, reflecting the market’s expectations of the FOMC’s next move – nothing in the foreseeable future.
And bonds – the largest market in the world – continue to reveal a risk-on environment.
High-yield bonds relative to Treasuries measure risky junk bonds' performance versus the safest fixed-income asset, US Treasury bonds.
The key characteristics of these assets create a critical risk gauge for bond and equity markets, as risk-seeking behavior in the bond market also bodes well for risk assets.
Check out the High Yield versus US Treasury Bond ratio ($HYG/$IEI):