Will Fed Rate Cuts Bring Relief to Struggling Long Bonds? | invest.com – Investing.com Canada

Will Fed Rate Cuts Bring Relief to Struggling Long Bonds?  |  invest.com – Investing.com Canada

Modest gains in some fixed-income sectors contrast with sharp losses elsewhere for year-to-date results with the broader U.S. bond market, based on a set of ETFs through Friday’s close (February 9).

The selective components of the market offer a slightly optimistic profile, but this is more than offset by sharp declines for longer-term maturities.

The standard benchmark for investment-grade fixed income, however, remains underwater.

The Vanguard Total Bond Market Index Fund (NASDAQ:), which tracks a widely followed benchmark as a bellwether for the broad fixed-income sector, has lost 1.3% since the start of the year.

This setback contrasts with the BND’s rebound in 2023 after the sharp loss of the previous year.

US bond total returns year-to-date

The best performing year to date for the bond market components listed above is the SPDR Bloomberg Investment Grade Floating Rate ETF (NYSE:), which is up 0.8% so far in 2024.

The fund benefited from higher interest rate increases through its portfolio of variable rate securities.

But with the Federal Reserve expected to begin cutting interest rates later this year, floating-rate bonds could face headwinds in the coming months after rising over the past year and a half.

Headwinds are already blowing hard on long-term Treasuries

The biggest loss in the bond market so far this year is in the iShares 20+ Year Treasury Bond ETF (NASDAQ:), which is down 4.8% in 2024.

This drop more than offsets TLT’s modest rebound in 2023, which barely dented the heavy losses of the previous two years.

A major challenge for Treasuries is the current restrictive policy maintained by the Federal Reserve.

The central bank has stopped raising interest rates and most estimates will start cutting them at some point this year, but there is still a long way to go before monetary policy becomes neutral, which which is much less easy.

The current federal funds rate, between 5.25% and 5.50%, is well above the recently estimated range of 0.9% to 1.1% for the neutral rate, based on a pair of models run by the New York Fed.

Meanwhile, the resilience of the U.S. economy is raising new doubts about when it will begin cutting rates.

A March cut is now off the table, according to federal funds futures. The May 1 FOMC meeting is now estimated as the earliest start date for easing, although futures are pricing in a modest probability of around 63% this morning.

Lower rates by June are more likely, with a probability of over 90%.

Every time the rate cuts begin, they can’t come fast enough for the battered kingdom of long-term Treasuries.


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