It has been a frustrating last two weeks if you’re watching the bond market, to say the least. 10-year Treasury yields have trended sideways, not offering much of anything to work with. Since the break above 4.20% earlier this month, yields are capped by the ceiling around the 100-day moving average (purple line):
US Treasury 10-year yields (%) daily chart
And that technical predicament is what we’re still dealing with to begin trading in March. So, what does that tell us?
The rebound in Treasury yields so far this year owes also to a repricing in the Fed outlook. At the end of December, traders were pricing in the first Fed rate cut for March with 156 bps worth of rate cuts for the year. Powell & co. pushed back on that and now even odds for a June rate cut are only seen at ~76%. Meanwhile, there are only 82 bps worth of rate cuts priced in for the year.
In other words, we have seen market pricing converge to the Fed’s dot plots and the outlook set out by policymakers. Now that we have gotten to this point, the question is what comes next?
It looks like we’ve reached a compromise on the Fed outlook, with recent economic data points helping to guide markets accordingly. As such, having to move from six rate cuts to three can be argued as being much easier than having to decide if we’re going to have to reduce the three rate cuts priced in now to two or having to increase that to four.
The divergence in market expectations in November and December last year to the Fed’s own narrative was what helped to oversee the moves in January and February this year. We practically reversed that as traders converged back to the data and central bank communique.
Given the prevailing situation, it just means that it is going to be much tougher to justify a much higher run in yields. Economic data in the months ahead will once again be the determining factor. But for now at least, the bond market might have run out of juice until the next catalyst comes along.