While investors wait for the results of the FOMC meeting and an anticipated cut, the bond market is keeping an eye on the bigger picture. Bond yields are not going along with the program, as yields are up across the curve. Today, the 10-year Treasury reached 4.20%, the highest since September.
While investors seem to be bullish on the economy, the bond markets are signaling they aren’t convinced the mission to tackle inflation is accomplished, and they are reminding investors that we aren’t doing enough about our national debt.
A Fed Fund Rate cut affects short-term lending, such as auto loans, inventory purchases, the prime rate, margin rates, and credit cards. For investors with margin balances, lowering the FFR should reduce borrowing costs and potentially lower loan rates, thereby amplifying returns. Also, lower margin rates allow investors to leverage more to buy more securities.
While any decrease in rates is positive in the areas mentioned, and should drive yields lower in the short end, there won’t be much moving the needle on long-term loans such as mortgages.
In addition, the bond market is watching yields in other countries, such as Japan and the UK, as they rise due to their debt issues. For example, the 10-year and 30-year Japanese Government Bonds (JGBs) are trading close to 20-year highs (1) at 1.965% and 4.826%, respectively.
In summary, while short-term rate cuts may have a limited impact on long-term borrowing costs, the bond market remains focused on persistent inflation concerns and rising global debt levels. Attentive bond Investors could see buying opportunities as shifts in yields and market signals make for some volatility heading into year-end. Looking ahead, as rates fall, yields should decrease, making this a good time to buy on pullbacks.
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