A May 17, 2024, Barchart article asked if the Fed sent a signal when it announced it would reduce its quantitative tightening program beginning in June 2024. I concluded:
The bottom line is plenty of room exists for a recovery rally in the U.S. long bond market as capital flows from equities to bonds. I am a buyer on dips, expecting bonds to recover as rates move lower over the coming months. Moreover, the Fed’s reduction in QT starting in June 2024 signals that more accommodative monetary policy is on the horizon.
On May 17, the nearby long bond futures were at the 117-12 level. While the bonds have remained within the 2023 trading range, they were slightly higher, at near the 119 level in late July 2024.
Sideways trading continues
The 30-year U.S. Treasury bond futures have made lower highs and lower lows since the March 2020 pandemic-inspired record high.
The five-year chart shows that the long bond futures reached a 107-04 low in October 2023, the critical technical support level. In 2024, the bond futures have traded inside the 2023 low and high as the market consolidates and searches for direction.
In 2023, the long bond was as low as 107-04 and as high as 134-14. Over the first nearly seven months of 2024, the long bond range has been from 112-27 to 124-24 as the market is stuck in a sideways trend.
Inflation has stabilized- Increasing the odds of short-term rate cuts
Over the past months, inflation data has been trending towards the Fed’s 2% target, and unemployment has edged higher to 4.1% in the latest June jobs report. The Fed’s mandate is stable prices and full employment. After increasing the short-term Fed Funds Rate from zero in March 2022 to the current 5.375%, the central bank is now waiting for further validation of declining inflation before pivoting to a more accommodative monetary policy stance. The odds favor one 25 basis point rate cut before the November 2024 U.S. election. If inflation declines, we could see another small cut in December.
The U.S. election odds favor lower rates
The betting markets and polls now show a virtual toss-up between former President Trump and Vice President Harris. The June debate and July assassination attempt had given the Republicans the edge, but the Vice President’s polls have improved after President Biden decided to withdraw from the election and support his Vice President.
President Biden’s administration support an independent Federal Reserve, and while former President Trump did in his first term, he made no secret that he believes interest rates are too high, choking economic growth. Moreover, a “drill-baby-drill” and “frack-baby-frack” approach to U.S. energy policy could cause inflation to continue to decline as energy is a critical cost for all goods and services. However, a Harris administration would likely follow on the same path as the current President.
The case for lower or higher U.S. rates
The following factors favor falling U.S. interest rates over the coming months and into 2025:
- Inflation indicators, including CPI, PPI, and PCE, have declined from their post-pandemic highs and are trending towards the Fed’s 2% target.
- Unemployment at 4.1% has been edging higher.
- U.S. economic growth has slowed.
- The Fed has forecast rate cuts for 2024 and 2025.
- Fed Chairman Powell has indicated the central bank’s next move will be to cut the Fed Funds Rate.
- The Fed began decreasing its quantitative tightening in June 2024, taking some pressure off rates further along the yield curve.
The following factors could push rates higher over the period:
- The $35 trillion U.S. debt weighs on the U.S. credit level. As the creditworthiness declines, rates move higher.
- The bifurcation of the world’s nuclear powers has put downside pressure on bonds as traditional U.S. debt holders have sold or are not buying the government debt securities.
- The rising potential for a BRICS currency with some gold backing could reduce the U.S. dollar’s role as a reserve currency, leading to higher interest rates and lower bond prices.
The bonds are stuck in a neutral range as bullish and bearish factors pull U.S. interest rates in opposite directions. Eventually, support at 107-04 or resistance at 134-14 will give way and develop a trend. However, at the 119 level, the bonds are sitting in the middle of a directionless range in July 2024.
TLT is a highly liquid ETF that tracks long U.S. interest rates
The iShares 20+ Year Treasury Bond ETF (TLT) is a highly liquid product that tracks U.S. government interest rates further on the yield curve. At the $92.76 per share level, TLT had over $55.12 billion in assets under management. TLT trades an average of over 32.8 million shares daily and charges a 0.15% management fee. The $3.55 annual dividend translates to a 3.83% yield that covers the expense rate in half a month.
The chart shows the inside year in the TLT ETF, which traded between $82.42 and $109.35 in 2023 and $87.34 and $98.85 over the first seven months of 2024.
Like the long bond futures, TLT is sitting in the middle of the trading range.
I favor the upside in the bond market for the rest of 2024, as inflation is under control and trending toward the Fed’s target, unemployment is rising, and economic growth has slowed. However, 2025 could be another story as the debt threatens the U.S. credit rating, and the geopolitical landscape could decrease the U.S.’s economic and political leadership role.
I am a buyer of long bond futures or the TLT ETF at the current price levels but would look to take profits near the top end of the 2024 trading range. The consolidation will eventually lead to a break higher or lower, but the current factors impacting the U.S. government bond market are highly uncertain as the election approaches, and the geopolitical landscape remains a hornet’s nest of potential problems.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
