Treasuries See 2024 Gains Dwindle With December Fed Cut at Risk
Sunday, Nov 17, 2024 3:32 pm ET
4min read Treasury yields have experienced a rollercoaster ride in 2024, driven by market expectations for Fed rate cuts and economic data. However, as the year progresses, gains in the Treasury market are dwindling, with the likelihood of a December Fed cut diminishing. This article explores the factors contributing to the shift in market sentiment and the potential implications for investors.
Market expectations for Fed rate cuts in 2024 initially fueled gains in the Treasury market. In early 2024, swap contracts factored in rate reductions in November and December, pushing yields lower. However, the Fed's dovish stance, signaling a potential slowdown in rate hikes, and weak inflation data also played a role in market anticipation of rate cuts.
As the year unfolded, the Fed's policy statements and communications significantly influenced market expectations. In November 2024, the Fed reduced projected rate cuts for the year to just one, leaving the central bank at odds with market expectations. This shift in communication led to a trim in gains for US Treasuries. However, market pricing still factored in rate reductions in November and December, indicating a divergence between Fed projections and market expectations.
Market participants have adjusted their trading strategies and asset allocations in response to evolving Fed rate cut expectations. As of November 7, 2024, traders see a good chance that the Fed will cut rates again in December, with a 67% chance of a quarter-point cut and a 33% chance of a pause. However, the probability of a January skip has risen to 71%, indicating market uncertainty about future rate cuts.
The Fed's decision to hold rates steady in December 2023, despite expectations of a cut, was influenced by the easing of inflation and a robust jobs market. Inflation, which had peaked at over 9% in 2022, dropped to a 3.1% annual rate in November 2023, while the unemployment rate remained low. This data led the Fed to project only a single quarter-point cut by the end of 2024, leaving the central bank at odds with market expectations.
Geopolitical tensions and global economic trends have also impacted Treasury yields in 2024. The Federal Reserve's dovish stance, projecting a single rate cut by the end of the year, initially boosted yields. However, market expectations for additional cuts in November and December, as indicated by swap contracts, pushed yields lower. The Fed's decision to hold rates steady in September and the market's anticipation of a December cut contributed to this trend. Meanwhile, weak inflation data further supported the likelihood of rate cuts, driving Treasury yields down.
In conclusion, the Treasury market has witnessed a dynamic year in 2024, with gains dwindling as market expectations for a December Fed cut diminish. Investors should remain vigilant and adapt their trading strategies and asset allocations in response to evolving Fed rate cut expectations. As the year draws to a close, the focus will be on the Fed's December meeting and the potential implications for the Treasury market and broader economy.
Market expectations for Fed rate cuts in 2024 initially fueled gains in the Treasury market. In early 2024, swap contracts factored in rate reductions in November and December, pushing yields lower. However, the Fed's dovish stance, signaling a potential slowdown in rate hikes, and weak inflation data also played a role in market anticipation of rate cuts.
As the year unfolded, the Fed's policy statements and communications significantly influenced market expectations. In November 2024, the Fed reduced projected rate cuts for the year to just one, leaving the central bank at odds with market expectations. This shift in communication led to a trim in gains for US Treasuries. However, market pricing still factored in rate reductions in November and December, indicating a divergence between Fed projections and market expectations.
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Market participants have adjusted their trading strategies and asset allocations in response to evolving Fed rate cut expectations. As of November 7, 2024, traders see a good chance that the Fed will cut rates again in December, with a 67% chance of a quarter-point cut and a 33% chance of a pause. However, the probability of a January skip has risen to 71%, indicating market uncertainty about future rate cuts.
The Fed's decision to hold rates steady in December 2023, despite expectations of a cut, was influenced by the easing of inflation and a robust jobs market. Inflation, which had peaked at over 9% in 2022, dropped to a 3.1% annual rate in November 2023, while the unemployment rate remained low. This data led the Fed to project only a single quarter-point cut by the end of 2024, leaving the central bank at odds with market expectations.
Geopolitical tensions and global economic trends have also impacted Treasury yields in 2024. The Federal Reserve's dovish stance, projecting a single rate cut by the end of the year, initially boosted yields. However, market expectations for additional cuts in November and December, as indicated by swap contracts, pushed yields lower. The Fed's decision to hold rates steady in September and the market's anticipation of a December cut contributed to this trend. Meanwhile, weak inflation data further supported the likelihood of rate cuts, driving Treasury yields down.
In conclusion, the Treasury market has witnessed a dynamic year in 2024, with gains dwindling as market expectations for a December Fed cut diminish. Investors should remain vigilant and adapt their trading strategies and asset allocations in response to evolving Fed rate cut expectations. As the year draws to a close, the focus will be on the Fed's December meeting and the potential implications for the Treasury market and broader economy.
