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The market is fighting the Fed: Fixed income strategist

Treasury bond yields have been steadily declining as many investors believe the Federal Reserve is done with interest rate hikes and may begin cutting rates as early as June of 2024. With recent commentary from the Bank Of Japan and November jobs data due out on Friday, predictions for the Fed's next move have been called into question.

RiverFront Global Fixed Income CIO Kevin Nicholson joins Yahoo Finance to discuss the current status of the market.

"I think you'll probably see the bond market go up by 10-15 basis points. I think that you're going to really see a sell-off abruptly and not to the same degree as the momentum that we got to the downside," Nicholson says. "But, I think that you're going to cause a lot of investors to re-think their investment thesis that the Fed is actually going to cut rates instead of just leaving them higher for longer."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

JOSH LIPTON: That big jobs number, Kevin, let's say that comes in, you know, hotter than expected, stronger than expected. What would you expect to see in response in the bond market?

KEVIN NICHOLSON: If it comes in hotter than expected, I think that you're going to probably see the bond market go up by 10 to 15 basis points. I think that you're going to really see a selloff abruptly, kind of-- and not to the same degree as the momentum that we got to the downside. But I think that you're going to cause a lot of investors to rethink their investment thesis that the Fed is actually going to cut rates instead of just leaving them higher for longer.

Because right now, the market is fighting the Fed. And, you know, that is our golden rule is not to fight the Fed. And all year long, the market has been fighting the Fed. And all year long, they have been incorrect. And so we'll see whether or not the Fed remains-- continues to have the advantage or if the market has the advantage.

JULIE HYMAN: And, Kevin, finally, I want to ask you also about a little bit of a, I guess, a technical support for Treasuries that we've seen to some extent for years, and that's foreign demand for Treasuries. Some of the more recent auctions, not just for foreign demand but domestic demand as well, has been choppier. How are you seeing that factor going into 2024 as well at play in the Treasury market?

KEVIN NICHOLSON: Well, Julie, it's funny that you mentioned the auctions because we have a three-year auction and a 10-year auction next week, and 30-year. And it's going to be important to look at those auction results next week to give us some insight of how it will-- how yields will react going forward. Because now that we're down nearing 4% on the 10-year, it's going to be a very different atmosphere as it pertains to the number of buyers that comes in.

Additionally, when you think about the fixed income markets, you think about Japan. Japan is the largest holder outside of the US of our Treasuries. And if the BOJ actually decides to finally get rid of yield curve control, their yields are going to go up. And that's going to entice more of Japanese buyers to actually stay at home and not participate in our Treasury market. So then that's going to take some demand out of the Treasury market as well. So that's part of the reason why I have yields-- expecting yields to be a little higher in 2024. But I don't think that we're going to reach the highs that we had-- we saw this year.

JOSH LIPTON: Kevin, thank you so much for joining us today. We appreciate it.

KEVIN NICHOLSON: Thanks, Josh.

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