Isaac Cockfield
The CFO
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Zack started in the financial services industry in 1999 at Merrill Lynch and has worked with many of the same clients for 20 plus years. In 2003, Zack earned the Certified Financial Planner® designation and can meet over Zoom to do an intro meeting.
Bond Market Continues to Price Out Rate Cuts
The bond market may have finally gotten the hint. After numerous attempts to “front-run” rate cuts in 2024, the bond market is now taking a less aggressive stance on rate cuts than even the Federal Reserve (Fed) has suggested in its most recent communications. Even before the March Consumer Price Index (CPI) report that continued to show sticky inflationary pressures, the bond market has been discounting the potential of rate cuts in 2024. Coming into the year, bond markets had penciled in nearly seven rate cuts for 2024, a number that we certainly disagreed with. Now, markets are hoping for two, which we think is more reasonable and likely tempers much higher yields in the near term.
The Number of Expected Rate Cuts Has Come Down Meaningfully This Year
Source: LPL Research, Bloomberg, 4/10/24
Moreover, the bond market thinks this rate-cutting cycle will be shallower than the Fed has suggested (absent a deep recession or financial crisis). Markets currently expect the Fed to take the fed funds rate down to 4% in 2026 versus the 3.125% rate that was recently highlighted on the Fed’s dot plot. With less than two cuts priced in and an expected neutral rate nearly 1% higher than the Fed’s expectations of how low interest rates can go this cycle, the bond market may have finally taken the hint that the Fed is in no rush to start cutting rates.
If there is a silver lining to the sell-off in the bond market, it’s that yields for high-quality fixed income remain elevated and provide very attractive (relative to history) income opportunities. And while price appreciation may be limited until inflationary pressures abate, which we think will happen, income levels remain attractive. It’s important to remember that fixed income investors don’t need yields to fall, per se, to generate positive returns, especially those investors that own individual bonds and can hold to maturity.
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International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
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High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
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Lawrence Gillum
Lawrence Gillum, CFA, guides the fixed income view for LPL Financial Research and has over 20 years of investing experience.
