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US Treasury yields climb on Fed rate cut predictions

US Treasury yields recover on cooling economic data, but concerns around the Fed's ability to deliver a soft landing are still lingering. Yahoo Finance's Jared Blikre analyzes bond market dynamics and investor sentiment on the Fed's future interest rate cuts forecasted for 2024.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

RACHELLE AKUFFO: US treasuries have erased this year's losses as signs of cooling inflation give way to more bets on future fed rate cuts. But treasury investors are growing increasingly concerned around the ability for the fed to deliver that soft landing. Yahoo Finance's Jared Blikre has those details for us. Hey, Jared.

JARED BLIKRE: Hi, Rachelle. We're talking about the US Bloomberg Treasury Index here. That has climbed back to 0% on the year. But not every investor who's investing in bonds has that exact allocation. One of the most common methods is TLT by iShares.

You can see that 20-plus year bond ETF in cyan here still down 9%. And I wanna compare it here to the Invesco QQQ index that tracks the NASDAQ 100. That is up a whopping 45% here, threatening to take out these highs from earlier.

And the thing about bonds is even last year, they were not any help to stocks during that tremendous downturn. And in fact, this would make the third year in a row, if we end up in the red, that bonds have lost money. And that's something that has only happened a couple other times in United States' history.

So very rare indeed to see the diversification that you usually get from bonds just simply disappear. But maybe, just maybe, it's coming back right now. So this is a year to date. Just wanna show you what it looks like over the last three years. And you can really see how TLT here in the cyan has just trended down that entire time and just barely off of the lows here. Meanwhile, the Qs, the NASDAQ 100, threatening to take out these ultimate highs-- these record highs from 2021.

I wanna take a look at the yield curve because a lot of the outperformance we've had over the last month has been because yields have dropped considerably. Here's where we were one month ago.

This is the US yield curve October 19. Here's where we are in cyan today. That is a difference of about 55 basis points in the longer end of the curve. And that means a lot because if yields had accelerated beyond 5%, that would have been a huge repricing, caused a lot of repricing. And it would have been a huge drag on risk markets.

I wanna show you something else, Rachelle, because you were looking at the expectations for rate cuts. This is a month ago comparison to where we are today. The cyan line is October. We were expecting fewer rate cuts closer to, let's say, three and change here as we are today four and change, so more rate cuts.

Does that mean that investors are more optimistic? Well, not necessarily. Rate cuts are not always a good thing if they are implemented in reaction to overcoming a recession. So if they're just gradual rate cuts where we were expecting a month ago, that's all well and good. But if the fed sees a recession on the horizon, they're gonna start cutting 100 basis points at a time very quickly. And then we're gonna be talking about 8 or 12 rate cuts.

So clearly, that hasn't happened just yet. But if investors feel the need to price in more rate cuts, that just steadily approaches that hard-landing scenario. So not there yet but just incrementally moving in that direction. Bottom line though, Rachelle, for investors, really happy to see at least one index for treasuries climbing back into the green this year and ending that three-year drought that we've had.

RACHELLE AKUFFO: Indeed. And keeping an eye on the potential for rate cuts. I guess be careful what you wish for, as you mentioned there, depending on why the fed is cutting those rates. I appreciate you as always, our very own Jared Blikre.

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