September Rate Cuts Satisfy Neither Bond Bulls nor Bears

The yield on the 10-year Treasury note is down around 50 basis points since its April highs, from 4.7% to 4.2%.
Evidence that the U.S. labor market is cooling and inflation is slowing have bolstered expectations that the Fed will slash interest rates at its September meeting.

However, the rate on the 10-year is still around 32 basis points higher than where it was entering the year—3.88%. At that time, investors had anticipated that the Fed would cut rates six times this year.

Of course, those expectations proved to be off the mark as a series of hot inflation readings in January, February and March kept the Fed from loosening monetary policy. 

The first quarter data caused investors to worry that inflation might be reaccelerating, and that the Fed could potentially hike rates rather than cut them.

But just as the six rate cut forecasts were off target, so too were the rate hike forecasts. Instead, it’s looking like we’re going to get something in the middle—two or three rate cuts starting in September.

IEF Flat, TLT Down in 2024

It’s a scenario that’s unlikely to satisfy either the bond bulls or the bond bears. The iShares 7-10 Year Treasury Bond ETF (IEF) is unchanged on the year, not far from its best levels of 2024, but hardly performance to cheer about. 

Investors who took more duration risk with the iShares 20+ Year Treasury Bond ETF (TLT) haven’t fared any better. The ETF was last sporting a year-to-date loss of 3.5%. 

Bond bulls might take solace that the balance of risks may be shifting toward weakness in the economy rather than upside in inflation, which could represent a favorable tilt in the risk-reward for bonds.

On the other hand, there are some who believe the floor for interest rates is higher today than it was a year or two ago due to structural shifts in the economy. If that’s the case, it will limit upside in bonds.