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Has Rate Cut Anticipation Run Its Course?

The Fed stopped raising rates in July, and by mid-October yields had peaked. Since then yields have begun to decline in anticipation of the Fed beginning rate cuts this year. At this point it appears that yields have found support and may possibly bounce or begin moving sideways. This chart is a little dense, so let’s try and clarify the technicals.

The next chart shows durations of five years or longer. Clearly they have broken out of the three month declining trend, so we anticipate that they will trend higher for a while.

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By comparison, shorter duration yields, two years and lower, present a much different picture. First, the very shortest durations, one month to three months, have not declined much at all. This accounts for the increased inversion between long and short duration yields. Additionally, while the one and two year yields have pulled back somewhat, they have not broken out of their declining trends yet. This will probably change as the longer duration yields continue to advance.

The Dynamic Yield Curve chart on StockCharts.com shows the severity of the yield inversion that currently exists. This should be abated somewhat as longer duration yields rise, but currently we have no expectation that the inversion will go away.

Conclusion: Yields have been declining for about three months, but most of the decline is concentrated in durations of five years and longer. This will alleviate some of the short versus long duration inversion that exists, but it is not likely to erase it. Significantly, the longer duration yields have broken their declining trends and will probably trend higher until rate cut fever returns.

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