Bond Market Continues to Price Out Rate Cuts

Lawrence Gillum | Chief Fixed Income Strategist

Last Updated: April 10, 2024

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.

Important Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

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.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

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.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

For Public Use – Tracking: #564503

Lawrence Gillum

Lawrence Gillum, CFA, guides the fixed income view for LPL Financial Research and has over 20 years of investing experience.