Last month Alphaville wrote about how hard the forecasting lark is, especially when it comes to interest rates. And even if you know exactly what rates will do it’s no guarantee that you’ll be able to predict the implications, such as how bond yields might respond. Belatedly we realised that we’ve just seen a great example of how tricky financial predictions are in the US Treasury market’s reaction to the fabled “Fed pivot” that finally materialised in September.
For almost two years investors and analysts had been anticipating the Fed cutting interest rates again. The view that this would mark an end to the bond market’s punishment and a peak in yields helped a record $600bn flow into bond funds last year. And yet . . . The 10-year Treasury yield has actually climbed by about 90 basis points since that first 50 basis point jumbo cut in September, despite the Fed trimming rates again at the two subsequent meetings, and two more quarter-point cuts being pencilled in for 2025. Yes this is not new, it’s mostly just the scale that’s eye-catching. And it’s obviously a slightly facile argument, given that yields had already moved a fair bit lower in the months leading up to the widely-signalled September pivot. Long bonds move for all sorts of reasons that have little to do with the ebb and flow of interest rates. However, most analysts still got it completely wrong even after it became clear that there was an element of “buy the rumour, sell the news” when yields bounced higher into the FOMC meeting and immediately after the cut. In late September the median Wall Street strategist forecast was that the post-FOMC yield bump would fade, and the 10-year Treasury yield would end 2024 at 3.74 per cent. It actually settled at 4.57 per cent. It’s almost tempting to paraphrase the old joke about FX analysts and say that God created fixed income strategists to make economists seem accurat