Milan Cacic
February 03, 2023
Social media News Weekly updateIF YOU BELIEVE THE BOND MARKET THEN THE NEXT MOVE FOR INTEREST RATES IS DOWN
On February 1st, the US Federal Reserve raised the target range for the Fed funds rate by 25 basis points (bps) to 4.50-4.75%. This is the 8th consecutive hike since the tightening cycle began in March of 2022, with a cumulative total policy tightening of 450 bps so far. According to the feds plotting data the rate will potentially rise as highs 5.25% sometime in 2023. However, the bond market is telling us a different story.
The table below tells us that the Fed fund rate over the past three months has risen by 0.75%. Meanwhile the 2-year, 5-year, 10-year and 30-year US treasury bond yields have dropped by 0.69%, 0.98%, 0.77%, and 0.59% respectively over the past three months. What this is telling us is that the bond market does not believe that the Fed will continue to raise rates and it's quite possible that the Federal Reserve will begin cutting rates sometime this year.
What makes this table even more interesting is the fact that during the last three months the Federal Reserve has been selling bonds into the market. These are the bonds that the Federal Reserve bought during the pandemic. Now that the economy is running on its own merits, the Federal Reserve is selling those bonds back to holders like you and me (quantitative tightening) which normally would make the price of the bonds go down and the yield go up on those same bonds. As you can see from the table, yields are dropping, which is even more telling that rates should be going down soon.
The end result of all this is a sigh of relief from the market. It is likely that going forward the market will not have to fight the major headwind of raising interest rates that it's been fighting for the last nine months. That is probably why "technically speaking" the market broke out this week.
I've also included a piece from our CIBC Economics Team entitled “A jolt from the JOLTS?" and the CIBC Monthly World Markets Report.
As always if you have any questions please feel free to give us a call at any time.
Milan