While investors seem convinced that we’re still on track for the soft or no landing outcome, they are also continuing to dial back their most optimistic projections. The 10-year Treasury yield moved back up to its highest level since December as the market gives up on the idea of a March rate cut and slowly starts to expect a less aggressive Fed in 2024. It’s probably the right position to take, although I think the bond market is still being a bit too aggressive in expecting 5 cuts this year.
As it stands right now, the combination of high GDP growth, low unemployment and elevated inflation doesn’t warrant a significant rate cutting cycle, but a slow normalization away from where policy was at when inflation was 9% seems reasonable. Looking at the chart, short-term Treasury yields never really seemed to buy into the idea that a March cut was in play. The 3-month yield tends to move lower in advance of a likely rate cut, generally in line with the Fed Funds rate. That yield is still about 15 basis points above it, which means we likely see at least a modest Treasury bill rally ahead of a cut. That hasn’t happened yet.
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