Benjamin Franklin, one of the U.S. Founding Fathers, once said, “In this world, nothing is certain except death and taxes.” In the bond market, lower short-term rates do not guarantee lower long-term rates.
In a September 20 Barchart article on the price action in the bond market, I concluded:
While Fed Funds Rate cuts over the coming months could cause a bond market rally in a kneejerk reaction, foreign relations and the massive U.S. debt level are the issues that will dictate the path of least resistance of long-term U.S. interest rates over the coming years.
On September 20, 2024, the December U.S. 30-year Treasury Bond futures were trading at the 125-00 level. After the FOMC cut the short-term Fed Funds Rate by a more-than-expected 50 basis points at the September meeting, the long bond futures and the TLT ETF product declined. Changes in the short-term rate do not guarantee the same in the longer-term rates. With respect to Benjamin Franklin, bonds are not death or taxes.
The Fed cuts short-term rates and says they will move even lower
The September FOMC meeting surprised the market as the Fed cut the short-term Fed Funds Rate by 50 basis points instead of the 25 basis point consensus expectations.
Meanwhile, citing that inflation is moving towards the central bank’s 2% target. On October 10, the September consumer price index data showed that inflation was 0.1% above forecasts, with CPI rising 0.2% and up 2.4% annually. Core CPI, excluding volatile food and energy prices, increased by 0.3%d and 3.3% annually. Time will tell if stubborn inflationary pressures will cause the Fed to curb its enthusiasm for rate cuts over the coming months. The central bank indicated plans to cut the Fed Funds Rate by another 50 basis points by the end of 2024 and 100 basis points in 2025. However, it issued a caveat that it will continue to depend on economic data regarding monetary policy decisions.
Bonds fall, and rates further on the yield curve rise
While short-term rates fell from a midpoint of 5.375% to 4.875%, rates further on the yield curve moved in the opposite direction.
The three-month chart of 30-year U.S. Treasury bonds shows the decline from 127-22 on September 17 to the 118-00 level after the latest September CPI data. Short-term rates may have moved lower, but long-term rates have increased.
The factors weighing on the U.S. bond market in Q4 2024
The following factors are weighing on the U.S. bond market, causing long-term rates to move higher over the past weeks:
- Inflation remains stubbornly above the central bank’s 2% target.
- The U.S. debt at over $35.77 trillion, and rising reduces the U.S.’s credit rating.
- Foreign buyers of U.S. debt have retreated, causing yields on U.S. government debt securities to increase.
- The bifurcation of the world’s nuclear powers on the geopolitical spectrum has weighed on the U.S. dollar’s reserve currency status and the demand for U.S. government debt securities.
- The uncertainty of the upcoming U.S. election and the future of U.S. domestic and foreign policy initiatives is bearish for the bond market. Markets hate uncertainty.
- The long-term U.S. government bond market trend since the 2020 high has been bearish.
While the central bank may have hoped its accommodative monetary policy pivot and reducing quantitative tightening would stabilize or lift long bonds and push rates lower, the opposite occurred.
The trend is always your best friend
The long-term trend in long bonds highlights the bearish trend.
The twenty-year chart shows the bullish trend ended in 2020, and the bearish path of least resistance since the March 2020 peak remains firmly intact in October 2024. Bond market trends can last for years, and the Fed’s pivot to accommodation did nothing to change the bearish trend.
Levels to watch in the long bond futures and TLT ETF
The long-term 30-year U.S. Treasury Bond futures show that support is at the October 2023 107-04 low with technical resistance at the April 2023 134-14 high. In 2024, the long bond futures have remained within the technical support and resistance levels.
The iShares 20+ Year Treasury Bond ETF (TLT) is a highly liquid ETF product that moves higher and lower with long-term U.S. government debt securities and, inversely, with U.S. interest rates further on the yield curve.
At $91.93 per share, TLT had over $59.4 billion in assets. TLT trades an average of around 36.5 million shares daily and charges a 0.15% management fee.
TLT’s twenty-year chart illustrates the same pattern as the U.S. long bond futures. Technical support is at the October 2023 $82.42 low, with resistance at the December 2022 $109.68 high. TLT has remained within the technical support and resistance levels in 2024. At $93.68, the ETF is below the midpoint, with a bearish bias.
The Fed has taken the pressure off short-term interest rates and has told markets they will continue an accommodative path. However, the bond market is ignoring the central bank as longer term rates are a function of market sentiment determined by the domestic and foreign economic environment. The bottom line is that the bond market is screaming that the issues facing the U.S. financial system, the geopolitical landscape, and uncertainty over U.S. policy following the November election require higher rates as the U.S. government’s credit rating remains under pressure. Lower short-term rates do not guarantee that longer-term interest rates will decline.
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.
