The Bond Market Could Be Looking Past a Hawkish Fed


The Federal Reserve painted a hawkish picture this week, but investors seem to be looking past it.

The central bank adjusted its “dot plot” on Wednesday to suggest it will lower interest rates just once this year. That’s down from the three cuts it projected since late 2023.

Borrowing costs, nonetheless, fell. Yields on the 10- and 30-year Treasuries slid to their lowest levels since the beginning of April. Stocks that typically benefit from lower rates, like utilities and real-estate investment trusts, climbed. What explains this divergence between the market and the central bank?

S&P 500, daily chart, showing select indicators and events.

Inflation and Energy

First, two inflation readings were lower than expected. The consumer price index (CPI) remained flat in May, despite forecasts for an increase. The producer price index (PPI) dropped 0.2 percent, below the projected 0.1 percent increase. Both numbers helped calm fears about price pressures in the economy. That, in turn, reduces the need for high interest rates.

Second, energy prices have come under pressure. Crude-oil inventories swelled by 3.7 million barrels last week and gasoline stockpiles grew by 2.6 million despite the summer driving season. The news came after OPEC+ showed signs of fracturing unity, which could further increase global supplies.

“Growth in the world’s demand for oil is expected to slow in the coming years as energy transitions advance,” the International Energy Agency said in a report on Wednesday. “Global oil production is set to ramp up, easing market strains and pushing spare capacity towards levels unseen outside of the Covid crisis.”

Given energy’s importance in prices, these negatives facing the oil market are potentially good news for inflation.

JOLTS job openings, courtesy of the St. Louis Federal Reserve.

Weaker Job Market?

There have also been signs of the job market weakening. Initial jobless claims rose to 242,000 last week — the highest level in 10 months. It was also the third straight week that claims were higher than expected.

Separately, the unemployment rate increased to 4 percent in May. It was higher than expected and the highest level in more than two years. Another report from the government showed 8.06 million job openings in April. It was the least since February 2021.

While other readings, like total payroll growth has been strong, those weak numbers may reflect a softening labor market. Such a trend would also be consistent with lower interest rates.

10-year Treasury Note yield ($TNX.X), weekly chart showing key levels and patterns. Note the index shows the yield multiplied by 10.

Bond Auctions

While most attention this week probably focused on the Fed meeting, something else more important may have happened: The U.S. Treasury Department successfully issued $61 billion of 10-year notes and 30-year bonds. Both auctions met with above-average demand, according to Bloomberg News and MarketWatch.

Bond yields move in opposite directions than price, so strong demand results in lower borrowing costs. Investor appetite for the securities reflects a potential belief that inflation and interest rates will decline. There are two other potentially important takeaways.

First is the level around 4.32 percent on the 10-year Treasury yield. It was a high from the subprime crisis in June 2008 and yields peaked there again in October 2022. They stayed below it for 11 months before pushing above, hammering stocks in the process. Yields have danced on either side of that level since but yesterday closed below it.

Second, bond yields ran higher in in 2021 and early 2022 — long before the Fed started hiking rates. That time, the market correctly anticipated a hawkish turn. This time, just the opposite is happening. Will the market be right again?

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.