Treasuries Send Out An Early Message of Caution On 2024 Trades

By Ven Ram, Bloomberg Markets Live analyst and reporter

As traders prepare for the release of Fed minutes, the markets are telegraphing an early, if somber, message: so much of the putative trades of 2024 were front-run in the past two months that chasing that theme may no longer be as rewarding.

Consider Treasuries.

The yield on two-year notes declined by almost 85 basis points through November and December. If you take the Fed at its word that it intends to cut its benchmark rate three times this year, you have to wonder how much further the emphatic rally can go.

Further out the curve, the 10-year yield slumped by more than 100 basis points over the same period. Even so, given rapidly crumbling inflation in the US and a Fed bracing itself to cut rates, this maturity is trading more or less around where it ought to. However, because the tenor is fully valued now, further gains will be hard to come by.

Stocks tell much the same story.

Equities seem to have won a prescriptive right in recent years to rally regardless of what happens to interest rates, an untenable script that can’t be glossed over forever. The Nasdaq 100 surged more than 15% through the last two months of 2023, and despite Tuesday’s correction, technology stocks are already trading as though their valuations are discounted by Fed rates that are far lower than current levels. Hence it should be challenging to drive valuations higher and higher. While the S&P 500 was far less exuberant through November and December, the basket is also mildly overvalued given a fair value of 4,632.

This has been the biggest two-month easing in financial conditions in history, surpassing the announcements of QE1, 2, 3, and so on. The market has priced in 136bps, or 5.5x rate cuts since the start of November. pic.twitter.com/zfldYgBBxr

— zerohedge (@zerohedge) December 27, 2023

The extraordinary moves in Treasuries and stocks of the past two months provide the context for the minutes of the Fed’s December meeting.

With Chair Jerome Powell having expressly stated that policymakers discussed a time line for reducing rates, traders will be keen to find out whether a March cut is still in play. Indications from New York Fed President John Williams suggest a reduction in March may be too early.

If the minutes reinforce that message, a continuation of the correction in Treasuries is likely.