Bond Market Update: Fed Likely to Cut Rates in September

Download the 8.28.24 Dynamic Bond Market Update for advisors’ use with clients

By Bill Smith, Fixed Income Trader and Portfolio Manager

The bond market has left investors feeling a bit whipsawed this month. After a weaker-than-expected jobs report, yields on the benchmark 10-year Treasury declined from 4% to 3.67%, only to retrace that move back to 4%—all within the first six trading days of the month.¹ The ICE BofA MOVE Index, a measure of bond market volatility that has averaged just 77 over the last decade, breached 120 on Aug. 5, and has remained above 100 throughout the first three weeks of this month. Amidst the volatility, Jerome Powell gave a dovish speech on Aug. 23, saying, “The time has come for policy to adjust.”² This statement all but confirms a rate cut at the next Federal Open Market Committee meeting in September, and bonds have reacted accordingly. Yields on most major fixed income indices moved lower, and year-to-date performance is now solidly positive on the year. The charts below summarize the yield and performance of select fixed income indices and tenors as of Aug. 23.

[Click on image of charts and graphs to enlarge.]

Past performance is no guarantee of future results.

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Stock/Bond Correlation

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Stocks and bonds moved in opposite directions to start the month—a welcome relief for 60/40 portfolios after nearly two years of positive correlations. The S&P 500 index was down over 6% from 07/31 to 08/05, while the U.S. Treasury Index was up 1.80% during that same period.

Source: Bloomberg, 22 August 2024. Rolling 30-day correlation between the S&P 500 Index and the Bloomberg US Treasury Index. Past performance is no guarantee of future results.

The correlation between stocks and bonds is often negative when inflation is well anchored. With the year-over-year Consumer Price index (YOY CPI) declining from 9.1 to 2.9 over the last two years, and YOY Core CPI dropping from 6.6 to 3.2, there is reason to be optimistic that bonds will play an important role in diversifying stock volatility moving forward.³ This is more likely to be the case if inflation continues on a sustainable path towards the Fed’s 2% target.

Source: Bloomberg, Harmont calculations using the S&P 500 Index and the Bloomberg US Treasury Index. CPI data from the Bureau of Labor Statistics, 22 August 2024

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Historical Performance – Easing Cycles

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Intermediate and long maturities have the potential to outperform short during easing cycles. The charts on the right look at the total returns for select bond indices at the beginning of the last three Fed easing cycles (March 2020 cuts excluded). While outperformance varied across fixed income sectors, maturity bands, and easing cycles, they illustrate the general tendency for intermediate and long maturities to outperform short when rates are falling.

With attractive yields still broadly available, and market expectations for future rate cuts increasing, extending duration should be an important consideration for most fixed income investors.

Source: ICE BofA Indexes, Bloomberg. Past performance is no guarantee of future results. We excluded the Covid-19 interest rate cuts in March 2020, as we believe this period is an outlier when compared to more traditional easing campaigns.

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Sources:

1. “Daily Treasury Long-Term Rates,” U.S. Department of the Treasury, Aug. 22, 2024
2. “Speech: Review and Outlook,” Board of Governors of the Federal Reserve System,” Aug. 23, 2024
3. “Consumer Price Index—July 2024,” U.S. Bureau of Labor Statistics, Aug. 14, 2024

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A prudent approach to fixed income investing calls for diversification across both credit and duration exposure. As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.

Should you need help navigating fixed income for your clients, please contact Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

Bill Smith serves as president, Portfolio Management & Trading, of Harmont Fixed Income in Phoenix

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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