Payden & Rygel: Bond market preparing ahead of time for lower rates
Investors spent the week awaiting Chair Powell's speech at the Jackson Hole Economic Symposium on Friday morning for clues on the timing of rate cuts. Expperts from Payden & Rygel doubt Powell settles the matter in Wyoming with another jobs report, preliminary benchmark annual revisions to earlier jobs reports, and another CPI report due before the September FOMC meeting. But they believe it's worth seeing how markets have performed with the Fed "on hold" for nine months.
'The two-year Treasury note clocked one of its best year-to-date performances outside of a recession since 2000 without a single rate cut. So, what gives? First, yields opened at their highest level since 2008, giving investors attractive income. Second, with the historic increase in tariffs, markets expect weaker growth while inflation remains subdued. Meanwhile, the labor market data has deteriorated, with job growth slowing and continuing claims for unemployment insurance reaching a cycle high again this week.
As a result, futures now imply a handful of rate cuts this year and next, providing investors with additional returns as yields fell from 4.24% to 3.87%. Regardless of the Chair's remarks on Friday, the bond market is preparing ahead of time for lower rates in the coming quarters. Is the move justified?'