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A Major Bond Market Gauge Plunges Into Its Worst Two-day Drop Since October as Markets Rethink the Path of Fed Rate Cuts

February 6, 2024
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On Monday, U.S. bonds extended a sell-off that began last week, triggered by robust economic data and a shift in the Federal Reserve's stance on the timing and extent of potential interest-rate cuts in the current year.

The benchmark 10-year Treasury yield rose to 4.163% on Monday, marking an approximately 30 basis-point surge since the beginning of February. This increase in rates used to finance the economy has led to a decline in bond prices, as yields and prices move in opposite directions.

Adam Abbas, Head of Fixed Income at Harris Associates, pointed out that the Federal Reserve's indication of a slow and patient approach to rate cuts, rather than the aggressive cuts anticipated by investors earlier in the year, has influenced market dynamics. Federal Reserve Chairman Jerome Powell, in a recent "60 Minutes" interview, reiterated the need for caution regarding rate cuts, and days before, the Fed maintained its policy rate at a 22-year high, with Powell expressing that a rate cut in March was unlikely.

The iShares Core U.S. Aggregate Bond ETF, a proxy for the broader fixed-income market, experienced a 0.8% decline on Monday, following a 0.9% slump on Friday. This marked the ETF's most significant two-day drop since October 3, 2023, according to Dow Jones Market Data.

Bonds, known for their explosive volatility in recent years, appeared to weigh on the stock market once again on Monday. The Dow Jones Industrial Average closed 0.7% lower, and the S&P 500 index ended down 0.3%. Despite the declines, these indexes remained up 1.8% and 3.6%, respectively, for the year.

Sam Millette, Director of Fixed Income for Commonwealth Financial Network, noted that a combination of the Fed's hawkish stance and strong economic data is prompting a reassessment of the outlook for potential rate cuts this year.

Despite the recent market turbulence, Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, highlighted the positive impact of Friday's strong jobs report and Monday's data on service-oriented companies, indicating ongoing economic growth. He suggested that the Fed will eventually cut rates, comparing it to being told you are going on vacation but need to know your budget first.

However, the ICE BofA Move Index, a measure of bond-market volatility, indicated heightened uncertainty with a reading of about 113 on Monday, up from approximately 106 on Friday. This level rivaled the highest point since the onset of the pandemic in March 2020. There are concerns that prolonged higher interest rates could negatively impact commercial real estate assets held by banks, with the SPDR S&P Regional Banking ETF falling 1.7% on Monday.

Adam Abbas at Harris Associates highlighted that bond volatility, as indicated by the MOVE index, is likely to continue influencing markets until the Fed provides more clarity on the timing of rate cuts.

In contrast, Michael Miller, President of Wellesley Asset Management, cautioned against expecting interest rates to return to the extremely low levels seen post-2008 financial crisis. He stated that having rates around 5% is normal, and the recent decline to 1% or 2% was a crisis-level event.

The surge in yields has resulted in several U.S. bond indexes posting negative returns at the start of 2024, while shares of many large bond exchange-traded funds have also turned negative, according to Trade Algo.


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