Treasury Market Rally May Continue as Fed Rate Cuts Loom

According to Yahoo News, the Treasury market's rally might still be in its early stages, as bonds tend to keep rallying even after Federal Reserve rate cuts have begun, according to a Bank of America note released on Thursday. Bond market investors have already sent yields tumbling over the past month in anticipation of the start of rate cuts. The 10-year yield has dropped from 5% in late October to about 4.12% now. Historically, between the last hike and first cut, the 10-year Treasury yield has declined in a range of 72 to 163 basis points, averaging a 107 basis point drop, according to analysts. By that measure, the rate could land between 2.25% and 3.15% by the time the Fed starts cutting in May 2024. If rates hit the bottom end of that range, it would mark the lowest since early 2022, when the Fed's tightening cycle was just beginning. Treasurys are also known to rally during the cutting cycle itself, with yields usually continuing to slide in the first six months. In addition, the upcoming easing cycle could go further than usual. Bank of America noted that due to the Fed's current high policy rate compared to the post-2008 levels, Fed cuts could last longer and go deeper than historical cycles. However, the bank's house forecast for a 10-year rate of 4.25% next year warns that any lingering inflation pressures could limit the bond rally compared to historical examples. Stickier-than-expected inflation could generally upset hopes for a Fed pivot, as central bank officials have warned that there still may be reason to keep policy restrictive. Nonetheless, cooling labor-market and inflation data has convinced markets that the hiking cycle is over.