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US 10-Year Yield: Retreat Signals Market Now Expects Fed Pivot Soon

By James PicernoBondsNov 15, 2023 07:44AM ET
www.investing.com/analysis/market-anticipates-fed-pivot-as-10year-yield-retreats-200643624
US 10-Year Yield: Retreat Signals Market Now Expects Fed Pivot Soon
By James Picerno   |  Nov 15, 2023 07:44AM ET
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Today’s “fair value” estimate of the US 10-year Treasury yield continues to suggest that the current market rate is unusually lofty and that the spread will soon narrow. Yesterday’s sharp drop in the 10-year yield (triggered by upbeat inflation news for October) suggests that the process of normalizing has started.

Tuesday’s bond market rally cut the 10-year rate to 4.44% (Oct. 14), marking a two-month low (bond prices and yields move inversely).

UST10Y-Daily Chart
UST10Y-Daily Chart

Meanwhile, CapitalSpectator.com’s fair-value estimate for October (using monthly data) shows that the market level surged to 1.94 percentage points – a 40-year high. (The model is based on the average of three methodologies, summarized here.) The current average model estimate for the 10-year rate is 2.86% for last month — far below 4.80% level for October (as well as yesterday’s 4.44%).

10-Yr Yield vs Avg. of Threee Fair-Value Model Estimates
10-Yr Yield vs Avg. of Threee Fair-Value Model Estimates

Although the modeling shows that October’s spread isn’t unprecedented, history suggests such an extreme level doesn’t last long. As I noted in last month’s update (which still applies today):

“The market is pricing the 10-year yield at what appears to be a lofty and arguably unsustainable level.”

10-Yr Yield Less Avg. Fair-Value Estimates
10-Yr Yield Less Avg. Fair-Value Estimates

Yesterday’s sharp slide in the 10-year rate may be the start of normalizing the spread. Catalysts include expectations that the Federal Reserve is done with rate hikes for this cycle.

“The market’s telling you they expect the Fed to start easing sooner rather than later,” says chief fixed income strategist Kathy Jones. “I would guess early 2024.”

Yesterday’s “positive inflation news helps cement the case for a Fed pause on rate hikes,” advises Morningstar senior U.S. economist Preston Caldwell.

In turn, the case appears to be strengthening for expecting a narrowing spread between the current 10-year yield and the average model estimate shown in the chart above.

US 10-Year Yield: Retreat Signals Market Now Expects Fed Pivot Soon
 

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US 10-Year Yield: Retreat Signals Market Now Expects Fed Pivot Soon

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Comments (7)
JaneJohn Doe
JaneJohn Doe Nov 15, 2023 2:09PM ET
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no recession, no cuts
Wyatt Ribarich
Wyatt Ribarich Nov 15, 2023 2:09PM ET
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c cc
Gonzalo Ribeiro
Gonzalo Ribeiro Nov 15, 2023 8:52AM ET
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Yield curve has been normalizing by skyrocketing long term rates which threatens bond market stability. Mr. Picerno may be right about rate cuts
go si
go si Nov 15, 2023 8:36AM ET
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well, inflation is gonna pivot too. these people are never gonna learn. cheap money breeds inflation.
U Thet Naung
U Thet Naung Nov 15, 2023 8:33AM ET
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2d help me
marlow seay
marlow seay Nov 15, 2023 8:28AM ET
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higher for longer ...
bryon bulgin
bryon bulgin Nov 15, 2023 8:25AM ET
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Woahh we bout to get a correction instead if this fake data the markets have been generating
Alan Louie
Alan Louie Nov 15, 2023 8:25AM ET
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Theres no way theyre gonna cut rates early 2024 when they havent even reached 2% inflation if they reached it by now or january then i can see that but inflation is still high i think they will wait till mid to late 2024 until they cut rates
bryon bulgin
bryon bulgin Nov 15, 2023 8:25AM ET
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Just know theres about be some manipulation to get there not suprising coming from us
 
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