Wall Street strategists and the bond market both anticipate interest rate cuts from the Federal Reserve in 2024. Yahoo Finance’s Jared Blikre examines forecasts for the 10-year Treasury yield (^TNX) next year , as global central banks consider adjusting their own monetary policies.
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Video transcription
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BRAD SMITH: The debate over the trajectory of the bond market rages. Treasury yields fell after the Fed’s announcement last week, with investors betting on a rate cut next year and possibly multiple rate cuts. So where are returns heading in 2024? For more on this, we have Yahoo Finance reporter Jared Blikre with us.
JARED BLIKRE: Thanks Brad. Bond predictions for 2024 are what gets my juices flowing here. I’m looking at the 10-year Treasury yield, which is currently 3.9%. It went from 4% or excuse me 5%. That’s a huge drop. And much of the bullish trend we’re seeing in the market that culminated with the Fed’s pivot last week is largely priced in. And here is what Wall Street thinks of the 10-year rate and where it will fall at the end of 2024, so one year.
TD Ameritrade believes the stock will fall 100 basis points. So roughly 2.9%, less than 3%. It would be a huge gesture. We see BMO Capital Markets about half that amount. And then we see some…some 10-year forecasts of increases. Bank of America and Barclays are the two largest. It looks like Barclays is up about 40 basis points. This would therefore currently represent around 4.3%. But that’s the long term. And when we talk about Federal Reserve policy, we have to talk about the short term because that’s where the rate cuts are happening. The long part tends to follow.
Here we have this top line. This is the number of rate cuts and where the expected benchmark on October 31 would be. That was about seven weeks ago. Since then, this forecast which extends to January 2025 has fallen precipitously. So market participants are expecting a lower final rate for the Federal Reserve at the end of this year, at the beginning of 2025. And that equates to almost seven. This is a rate cut of about 6.5. And the problem with all this, 6.5 rate cuts, it’s not a soft landing. If the Fed has to cut rates 6 times, let alone 8 or 10 times as some market participants are predicting, well, that’s a whole different matter, as the Fed is reacting to bad data and trying to get out of the loop. ‘dead end.
Let me show you another graph. This is Powell’s biggest problem. Fed Chairman Powell, after his big pivot, is still banking on a drop in inflation to 2%. But some key indicators are stagnating. This includes rent for accommodation in Scion and basic non-housing services. These are both annualized over three months. And you don’t have to pay attention to the whole picture. Everything I want people to focus on is here. They are up slightly and remain above 5%. That’s a huge level, and it takes a lot of work to get them below 2%.
Now let me show you another graph. These are the key rates of global central banks. We have the US Federal Reserve. It’s a trajectory. This goes back to the global financial crisis. The Fed has the highest rate here, 5% and foreign exchange. Next we have the ECB. It’s a little lower. And then the Bank of Japan is still in negative territory, -0.1%. And I bring this up because, without much fanfare, the Bank of Japan held a meeting last night, Uber, Uber conciliatory.
The yen has weakened the most in about a month or two. And I think the message to everyone in the world is convergence. And there should be a convergence of these rates, this can happen in two different ways. The Bank of Japan could raise rates, or it could simply count on the Fed and ECB to cut rates. And that seems to be what everyone is counting on: the Fed will cut rates next year, and the ECB will follow. And that should, in theory, I suppose, align everything, investors’ interests and prevent a disorderly unwinding of the global bond market. And given the Bank of Japan’s outsized influence and heavy stake in its local bond market, that’s a real possibility.
So all this is to say this when there is a lot of disagreement, and I return here to this initial table. When you have such divergent views on where the term is going to go next year, given that we just had a pivot, things are up in the air right now. I would say this is currently the pinnacle of dovishness on the part of the Federal Reserve. And if inflation rises even a little bit, they will have to reverse course and the market will reprice that risk very violently.
So if all goes well, if we get a soft landing, there will probably be two or three rate cuts next year, but not six or eight. The market cannot have it both ways.
SÉANA SMITH: And the market is moving with a certain optimism, with what they are setting and the aggressive price or rate cuts that are being made there. Jared Blikre, as always, thank you so much for explaining this to us.
