\n That said, downside risks for the U.S. economy \u2013 and particularly for the\n labour market \u2013 have not completely dissipated, and we do expect further\n supersized rate cuts from the Fed over the near term.\n <\/p>\n\n \n
More now, less later<\/h2>\n
\n With a 50 bps rate cut out of the gate, we think the Fed may have learned\n the lessons of the 2022 rate hike cycle. In March 2022, policymakers\n kicked things off with a standard hike of 25 bps, but immediately had to\n shift gears with a run of jumbo hikes of 50 bps, 75 bps, 75 bps, 75 bps,\n 75 bps, and 50 bps to play catch up to inflation before a series of 25 bps\n hikes closed out the policy tightening cycle in July 2023.\n <\/p>\n
\n So that risk of getting off to a slow start, and potentially falling\n behind a cooling economy, perhaps factored into the Fed\u2019s thinking, and is\n why we believe there will be at least a handful of more large cuts.\n Markets are pricing a swift return toward more neutral levels \u2013 that is to\n say, levels that are neither restrictive nor stimulative for economic\n growth and inflation \u2013 which the Fed now judges to be somewhere around three\n percent, still a historically elevated level.\n <\/p>\n \n
Markets are pricing a swift return to \u201cneutral\u201d interest rates<\/h3>\n \n \n ![\"Federal](\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/fed-price-of-success-en-chart-1.png\"\n)
\n \n The line chart shows the Federal Reserve\u2019s policy interest rate (the\n federal funds rate) relative to Fed estimates of the “neutral”\n interest rate for the economy from 1992 through September 2024, and\n projections through 2026. When the federal funds rate is above the\n neutral rate, policy is restricting economic growth and inflation;\n when the federal funds rate is below the neutral rate, interest rates\n are supporting economic growth. In December 2021, the Fed began\n raising the policy rate from 0.25% until it reached 5.5% in late 2023;\n it began to reduce the policy rate in June 2024. The federal funds\n rate rose past the neutral rate in September 2022 and remains\n significantly above it. Market pricing indicates the federal funds\n rate should fall back to the neutral rate in the first quarter of\n 2026.\n <\/p>\n
\n - \n <\/div>\n Federal funds rate\n <\/li>\n
- \n <\/div>\n Neutral rate\n <\/li>\n <\/ul>\n
\n Dashed lines indicate the market-implied path of the federal funds\n rate and the Federal Reserve\u2019s estimate of the neutral interest rate\n (a policy rate above neutral is considered restrictive of economic\n growth; a rate below is considered supportive). Shaded areas indicate\n U.S. recessions.\n <\/p>\n
\n Source – RBC Wealth Management, Federal Reserve Bank of New York,\n Bloomberg; data as of 9\/24\/24\n <\/p>\n <\/div>\n <\/div>\n
\n With all eyes on the labour market, consumer sentiment toward it is still\n deteriorating and supports our view that the Fed will likely deliver at\n least one more 50 bps reduction this year. Eighteen percent of consumers\n surveyed reported that jobs were \u201chard to get\u201d in the Conference Board\u2019s\n monthly survey for September, which is up from just 11 percent at the\n start of the year. Over the past 30 years, this survey has had a\n 90 percent correlation with the official unemployment rate and suggests\n that further rises in unemployment could be in the offing.\n <\/p>\n
\n And the bar to more rate cuts based on labour market conditions could be\n quite low. At the September policy meeting, the Fed\u2019s 100 bps of projected\n rate cuts this year was predicated on the unemployment rate rising only\n moderately further to 4.4 percent, from 4.2 percent. Should it rise\n faster, the Fed would likely also cut rates faster still. With two more\n payrolls reports scheduled to be released before the next meeting on\n Nov. 6\u20137, that data will be key in determining what the Fed does next.\n <\/p>\n
\n The main point is that we think the Fed needs to move quickly to return\n policy rates closer to \u201cneutral\u201d levels. The time to fine-tune and\n calibrate monetary policy more precisely around whatever level of interest\n rates that might be \u201cneutral\u201d for the economy will come later, in our\n view.\n <\/p>\n \n
Consumers continue to flag a weakening U.S. labour market<\/h3>\n \n \n ![\"Percentage](\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/fed-price-of-success-en-chart-2.png\"\n)
\n \n The line chart shows the Conference Board’s Consumer Confidence Survey\n sub-index of the percentage of respondents who saw jobs as \u201chard to\n get,\u201d and the U.S. unemployment rate. The two data series tend to move\n together. The percentage of respondents who viewed jobs as hard to get\n rose to 18.3% in September from 16.8% in August.\n <\/p>\n
\n - \n <\/div>\n “Jobs hard to get” (left)\n <\/li>\n
- \n <\/div>\n U.S. unemployment rate (right)\n <\/li>\n <\/ul>\n
\n \u201cJobs hard to get\u201d represents the percentage of respondents to the\n Conference Board\u2019s monthly Consumer Confidence Survey expressing that\n view. Shaded areas indicate U.S. recessions.\n <\/p>\n
\n Source – RBC Wealth Management, U.S. Bureau of Labor Statistics,\n Conference Board; data through September 2024\n <\/p>\n <\/div>\n <\/div>\n\n \n
The price of success is steep, but not too steep<\/h2>\n
\n The yield curve is probably one of the most important, and reliable,\n market signals there is with respect to the economic outlook. Intuitively,\n it\u2019s quite simple. The Fed controls short-term rates, while longer-term\n rates are largely influenced by market participants and generally reflect\n the market\u2019s expectations for economic growth and inflation.\n <\/p>\n
\n When the curve is inverted, as it had been up until recently, it\u2019s the\n market\u2019s signal that policy rates are likely restricting economic activity\n and inflation. When the opposite is true, the Fed\u2019s policy rate is judged\n to be stimulative for growth and inflation.\n <\/p>\n
\n For investors still wary about recessions risks, this may be the metric to\n watch. There\u2019s no hard and fast rule \u2013 wouldn\u2019t that be nice \u2013 but\n historically it appears to be the case that once the yield curve has\n re-steepened to >100 bps it has been closely followed by a recession.\n Intuitively, that gap grows because the 2-year Treasury yield is dropping\n sharply, and faster than long-term yields, on the market\u2019s expectations\n that the Fed will be delivering deep rate cuts in response to an economic\n contraction.\n <\/p>\n
\n But can the Fed find the middle ground? There\u2019s really only one episode of\n the yield curve simply staying flat after a series of Fed rate cuts that\n were then held steady for a period of time, which came in the mid-to-late\n 1990s. Current consensus rate forecasts do indeed have the yield curve\n holding this \u201cGoldilocks range\u201d \u2013 a relatively steep yield curve that should\n signal modest support for the economy without reigniting inflation risks,\n but not so steep that the Fed is likely cutting rates because of a\n recession.\n <\/p>\n \n
The end of an inversion<\/h3>\n \n The 10Y\/2Y Treasury yield curve\u2019s return to positive territory after a\n period of deep inversion may have significant economic ramifications\n <\/h4>\n \n \n ![\"Difference](\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/fed-price-of-success-en-chart-3.png\"\n)
\n \n The line chart shows the difference in yields of 10-year and 2-year\n Treasury bond from 1988 through September 2024, and the consensus\n forecast through 2026. The difference became negative in mid-2022, a\n condition known as a yield curve inversion. It recently became\n positive again, and the consensus forecast indicates it will continue\n to move upward and remain positive through 2026.\n <\/p>\n
\n - \n <\/div>\n 10Y\/2Y Treasury yield curve\n <\/li>\n
- \n
<\/div>\n Consensus yield curve forecast\n <\/li>\n - \n <\/div>\n 100 basis points: Our threshold to watch\n <\/li>\n <\/ul>\n
Shaded areas indicate U.S. recessions.<\/p>\n
Source – RBC Wealth Management, Bloomberg<\/p>\n <\/div>\n <\/div>\n\n \n
Fixed income portfolio strategy<\/h2>\n
\n Policymakers may have just started cutting rates, but in the eyes of\n markets, it\u2019s as though they\u2019ve already finished.\n <\/p>\n
\n As is usually the case, markets price the future. And as it stands,\n markets are fully priced for 200 bps of further rate cuts through 2025,\n which is already being largely reflected in bond prices and yields.\n <\/p>\n
\n Most fixed income sectors have been on a strong run over the past year,\n gaining an even bigger head of steam back in April when the 10-year\n Treasury yield hit 4.7 percent, which has since faded as low as\n 3.6 percent. As yields fall, bond prices rise, and on top of coupons\n earned, this combination has fueled strong total return performance of\n late.\n <\/p>\n
\n We have spent the past few months urging investors to exit cash and\/or\n short-maturity bonds in favour of locking in yields via longer maturities\n ahead of Fed rate cuts.\n <\/p>\n
\n The Bloomberg U.S. Aggregate Bond Index is up eight percent over the past\n year \u2013 or what is typically a strong year for the S&P 500 Index.\n High-yield corporate bonds are in the midst of one of their best runs on\n record \u2013 partly reflecting investor optimism that the Fed, at least for now,\n has staved off recession risks.\n <\/p>\n
\n Unfortunately for fixed income investors, a lot of performance has already\n been squeezed out of bond markets, and to extract significantly more juice\n from them at the current juncture would likely require markets repricing\n greater risks of a hard landing for the U.S. economy \u2013 something that is not\n currently our view.\n <\/p>\n
\n So, the playbook may not be much more exciting than \u201cbuying the dips\u201d in\n bonds, or increases in yields, gradually extending duration in the process\n and keeping fixed income sector allocations relatively neutral, as there\n are few clearly attractive options available at the moment, in our view.\n <\/p>\n
\n As credit markets remain historically rich, we would still favour quality.\n Even in a best-case scenario for the economy, we think sectors like\n investment-grade bonds will likely only keep pace with U.S. Treasury bonds\n in terms of performance, so we would likely favour the downside\n protection \u2013 and capital preservation \u2013 that Treasuries could provide for\n portfolios in the event of a recession.\n <\/p>\n \n
Bonds have been on a strong run for the past 12 months<\/h3>\n Market performance since the previous Fed rate hike (July 2023)<\/h4>\n \n \n ![\"Total](\"https:\/\/www.rbcwealthmanagement.com\/assets\/wp-content\/uploads\/global\/fed-price-of-success-en-chart-4.png\"\n)
\n \n The chart shows the total returns for major U.S. fixed income markets\n since the Fed last raised rates in July 2023. All markets have trended\n generally upward. Treasuries have returned 6.4%. The U.S. Aggregate\n Index has returned 8.0%. Investment grade corporate bonds have\n returned 10.6%. Speculative grade corporate bonds have returned 14.8%.\n Municipal bonds have returned 5.2%.\n <\/p>\n
\n - \n <\/div>\n U.S. Treasuries\n <\/li>\n
- \n <\/div>\n Investment-grade corporates\n <\/li>\n
- \n <\/div>\n High-yield corporates\n <\/li>\n
- \n <\/div>\n U.S. Aggregate Bond Index\n <\/li>\n
- \n <\/div>\n Municipals\n <\/li>\n <\/ul>\n
\n Source – RBC Wealth Management, Bloomberg; Treasuries represented by\n the Bloomberg U.S. Treasury Index, corporates by the Bloomberg U.S.\n Corporate Bond Index and U.S. High Yield Corporate Bond Index,\n municipals by the Bloomberg Municipal Bond Index; data through 9\/23\/24\n <\/p>\n <\/div>\n <\/div>\n\n \n
Consumer rate implications<\/h2>\n
\n Finally, what do the Fed\u2019s rate cuts mean as a practical matter? As noted,\n Treasury yields have been dropping for months on investor anticipation of\n Fed rate cuts, so as we see it, much of what the Fed does from here is\n simply following through. Put differently, market rates have already\n priced in the bulk of future rate cuts, and consumer rates should\n gradually reflect that in the months ahead.\n <\/p>\n
\n For example, 30-year mortgage rates are essentially priced off the 10-year\n Treasury yield. On April 25, both the 10-year Treasury yield and the\n average 30-year mortgage rate hit a 2024 high of 4.7 percent and\n 7.6 percent, respectively. Since then, each has declined by roughly 90 bps\n to 3.8 percent and 6.7 percent, respectively.\n <\/p>\n
\n So, where might mortgage rates head from here? There are two things to\n consider: the 10-year Treasury yield itself, and the gap between it and\n 30-year mortgage rates, which currently stands at roughly 300 bps.\n <\/p>\n
\n The Bloomberg consensus analyst survey for September now has the 10-year\n yield falling to 3.7 percent by early next year, and toward 3.6 percent by\n the end of 2025. Should spreads stay flat, that would suggest to us that\n mortgage rates might have already reached their near-term lows.\n <\/p>\n
\n But what about spreads? At 300 bps over the 10-year Treasury yield,\n mortgage rates are historically expensive. Prior to the pandemic, that\n spread was closer to 150 bps\u2013200 bps. The reasons are too numerous to\n cover here, but in short, we do see some scope for mortgage spreads to\n compress, particularly if the Fed ceases shrinking its balance sheet, as\n we see as likely later in 2025.\n <\/p>\n
\n If lower yields and narrower mortgage spreads come together, we think the\n next stop for mortgage rates could be 6.0 percent, fading toward\n 5.0 percent later on. But lower rates than that might only come about in a\n recessionary episode.\n <\/p>\n\n \n
Not quite there yet<\/h2>\n
\n The Fed hopes that a series of interest rate cuts will be enough to stave\n off a recession and support a continuation of the economic expansion. But\n it must be said, that\u2019s always how central bankers hope that easing cycles\n play out \u2013 it\u2019s just rarely the case that they do.\n <\/p>\n
\n While we are encouraged by the Fed\u2019s proactiveness and support the view\n that a soft landing remains on the table, we must be cognizant of the fact\n that after an aggressive rate hike cycle, and one which saw about\n 14 months between the last hike and the first cut, the balance of risks\n for the economy is naturally going to be tilted to the downside for some\n time yet.\n <\/p>\n","protected":false},"excerpt":{"rendered":"
The Fed has finally aggressively lowered interest rates. While a steeper yield curve reflects the market\u2019s optimism that rate cuts will shore up the economic outlook, further steepness could be a sign the Fed will cut rates deeply, likely due to a recession.<\/p>\n","protected":false},"author":15,"featured_media":13483,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2024-10-02T09:33:38","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42],"tags":[],"rbcwm_content_owner":[390],"rbcwm_need":[],"rbcwm_segment":[],"rbcwm_solution":[],"rbcwm_topic":[212],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-13482","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","rbcwm_content_owner-pag","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"The Fed has finally aggressively lowered interest rates. While a steeper yield curve reflects the market\u2019s optimism that rate cuts will shore up the economic outlook, further steepness could be a sign the Fed will cut rates deeply, likely due to a recession.","rbcwm_post_author":[92],"rbcwm_custom_breadcrumb_text":"","rbcwm_custom_breadcrumb_link_url":"","rbcwm_disclaimers":{"add_disclosures":["Yes"],"perspective_disclaimer":"","expandable":"","omit_from_pages":[],"disclaimer_footnote":""},"rbcwm_insight_cta_id":[8376],"rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false,"rbcwm_toc_selector":"h2"},"yoast_head":"\n
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\n \n The line chart shows the Federal Reserve\u2019s policy interest rate (the\n federal funds rate) relative to Fed estimates of the “neutral”\n interest rate for the economy from 1992 through September 2024, and\n projections through 2026. When the federal funds rate is above the\n neutral rate, policy is restricting economic growth and inflation;\n when the federal funds rate is below the neutral rate, interest rates\n are supporting economic growth. In December 2021, the Fed began\n raising the policy rate from 0.25% until it reached 5.5% in late 2023;\n it began to reduce the policy rate in June 2024. The federal funds\n rate rose past the neutral rate in September 2022 and remains\n significantly above it. Market pricing indicates the federal funds\n rate should fall back to the neutral rate in the first quarter of\n 2026.\n <\/p>\n
- \n
- \n <\/div>\n Federal funds rate\n <\/li>\n
- \n
<\/div>\n Neutral rate\n <\/li>\n <\/ul>\n\n Dashed lines indicate the market-implied path of the federal funds\n rate and the Federal Reserve\u2019s estimate of the neutral interest rate\n (a policy rate above neutral is considered restrictive of economic\n growth; a rate below is considered supportive). Shaded areas indicate\n U.S. recessions.\n <\/p>\n
\n Source – RBC Wealth Management, Federal Reserve Bank of New York,\n Bloomberg; data as of 9\/24\/24\n <\/p>\n <\/div>\n <\/div>\n
\n With all eyes on the labour market, consumer sentiment toward it is still\n deteriorating and supports our view that the Fed will likely deliver at\n least one more 50 bps reduction this year. Eighteen percent of consumers\n surveyed reported that jobs were \u201chard to get\u201d in the Conference Board\u2019s\n monthly survey for September, which is up from just 11 percent at the\n start of the year. Over the past 30 years, this survey has had a\n 90 percent correlation with the official unemployment rate and suggests\n that further rises in unemployment could be in the offing.\n <\/p>\n
\n And the bar to more rate cuts based on labour market conditions could be\n quite low. At the September policy meeting, the Fed\u2019s 100 bps of projected\n rate cuts this year was predicated on the unemployment rate rising only\n moderately further to 4.4 percent, from 4.2 percent. Should it rise\n faster, the Fed would likely also cut rates faster still. With two more\n payrolls reports scheduled to be released before the next meeting on\n Nov. 6\u20137, that data will be key in determining what the Fed does next.\n <\/p>\n
\n The main point is that we think the Fed needs to move quickly to return\n policy rates closer to \u201cneutral\u201d levels. The time to fine-tune and\n calibrate monetary policy more precisely around whatever level of interest\n rates that might be \u201cneutral\u201d for the economy will come later, in our\n view.\n <\/p>\n \n
Consumers continue to flag a weakening U.S. labour market<\/h3>\n
\n\n\n \n The line chart shows the Conference Board’s Consumer Confidence Survey\n sub-index of the percentage of respondents who saw jobs as \u201chard to\n get,\u201d and the U.S. unemployment rate. The two data series tend to move\n together. The percentage of respondents who viewed jobs as hard to get\n rose to 18.3% in September from 16.8% in August.\n <\/p>\n
- \n
- \n <\/div>\n “Jobs hard to get” (left)\n <\/li>\n
- \n
<\/div>\n U.S. unemployment rate (right)\n <\/li>\n <\/ul>\n\n \u201cJobs hard to get\u201d represents the percentage of respondents to the\n Conference Board\u2019s monthly Consumer Confidence Survey expressing that\n view. Shaded areas indicate U.S. recessions.\n <\/p>\n
\n Source – RBC Wealth Management, U.S. Bureau of Labor Statistics,\n Conference Board; data through September 2024\n <\/p>\n <\/div>\n <\/div>\n\n \n
The price of success is steep, but not too steep<\/h2>\n
\n The yield curve is probably one of the most important, and reliable,\n market signals there is with respect to the economic outlook. Intuitively,\n it\u2019s quite simple. The Fed controls short-term rates, while longer-term\n rates are largely influenced by market participants and generally reflect\n the market\u2019s expectations for economic growth and inflation.\n <\/p>\n
\n When the curve is inverted, as it had been up until recently, it\u2019s the\n market\u2019s signal that policy rates are likely restricting economic activity\n and inflation. When the opposite is true, the Fed\u2019s policy rate is judged\n to be stimulative for growth and inflation.\n <\/p>\n
\n For investors still wary about recessions risks, this may be the metric to\n watch. There\u2019s no hard and fast rule \u2013 wouldn\u2019t that be nice \u2013 but\n historically it appears to be the case that once the yield curve has\n re-steepened to >100 bps it has been closely followed by a recession.\n Intuitively, that gap grows because the 2-year Treasury yield is dropping\n sharply, and faster than long-term yields, on the market\u2019s expectations\n that the Fed will be delivering deep rate cuts in response to an economic\n contraction.\n <\/p>\n
\n But can the Fed find the middle ground? There\u2019s really only one episode of\n the yield curve simply staying flat after a series of Fed rate cuts that\n were then held steady for a period of time, which came in the mid-to-late\n 1990s. Current consensus rate forecasts do indeed have the yield curve\n holding this \u201cGoldilocks range\u201d \u2013 a relatively steep yield curve that should\n signal modest support for the economy without reigniting inflation risks,\n but not so steep that the Fed is likely cutting rates because of a\n recession.\n <\/p>\n \n
The end of an inversion<\/h3>\n
\n The 10Y\/2Y Treasury yield curve\u2019s return to positive territory after a\n period of deep inversion may have significant economic ramifications\n <\/h4>\n
\n\n\n \n The line chart shows the difference in yields of 10-year and 2-year\n Treasury bond from 1988 through September 2024, and the consensus\n forecast through 2026. The difference became negative in mid-2022, a\n condition known as a yield curve inversion. It recently became\n positive again, and the consensus forecast indicates it will continue\n to move upward and remain positive through 2026.\n <\/p>\n
- \n
- \n <\/div>\n 10Y\/2Y Treasury yield curve\n <\/li>\n
- \n
- \n
<\/div>\n 100 basis points: Our threshold to watch\n <\/li>\n <\/ul>\nShaded areas indicate U.S. recessions.<\/p>\n
Source – RBC Wealth Management, Bloomberg<\/p>\n <\/div>\n <\/div>\n\n \n
Fixed income portfolio strategy<\/h2>\n
\n Policymakers may have just started cutting rates, but in the eyes of\n markets, it\u2019s as though they\u2019ve already finished.\n <\/p>\n
\n As is usually the case, markets price the future. And as it stands,\n markets are fully priced for 200 bps of further rate cuts through 2025,\n which is already being largely reflected in bond prices and yields.\n <\/p>\n
\n Most fixed income sectors have been on a strong run over the past year,\n gaining an even bigger head of steam back in April when the 10-year\n Treasury yield hit 4.7 percent, which has since faded as low as\n 3.6 percent. As yields fall, bond prices rise, and on top of coupons\n earned, this combination has fueled strong total return performance of\n late.\n <\/p>\n
\n We have spent the past few months urging investors to exit cash and\/or\n short-maturity bonds in favour of locking in yields via longer maturities\n ahead of Fed rate cuts.\n <\/p>\n
\n The Bloomberg U.S. Aggregate Bond Index is up eight percent over the past\n year \u2013 or what is typically a strong year for the S&P 500 Index.\n High-yield corporate bonds are in the midst of one of their best runs on\n record \u2013 partly reflecting investor optimism that the Fed, at least for now,\n has staved off recession risks.\n <\/p>\n
\n Unfortunately for fixed income investors, a lot of performance has already\n been squeezed out of bond markets, and to extract significantly more juice\n from them at the current juncture would likely require markets repricing\n greater risks of a hard landing for the U.S. economy \u2013 something that is not\n currently our view.\n <\/p>\n
\n So, the playbook may not be much more exciting than \u201cbuying the dips\u201d in\n bonds, or increases in yields, gradually extending duration in the process\n and keeping fixed income sector allocations relatively neutral, as there\n are few clearly attractive options available at the moment, in our view.\n <\/p>\n
\n As credit markets remain historically rich, we would still favour quality.\n Even in a best-case scenario for the economy, we think sectors like\n investment-grade bonds will likely only keep pace with U.S. Treasury bonds\n in terms of performance, so we would likely favour the downside\n protection \u2013 and capital preservation \u2013 that Treasuries could provide for\n portfolios in the event of a recession.\n <\/p>\n \n
Bonds have been on a strong run for the past 12 months<\/h3>\n
Market performance since the previous Fed rate hike (July 2023)<\/h4>\n
\n\n\n \n The chart shows the total returns for major U.S. fixed income markets\n since the Fed last raised rates in July 2023. All markets have trended\n generally upward. Treasuries have returned 6.4%. The U.S. Aggregate\n Index has returned 8.0%. Investment grade corporate bonds have\n returned 10.6%. Speculative grade corporate bonds have returned 14.8%.\n Municipal bonds have returned 5.2%.\n <\/p>\n
- \n
- \n <\/div>\n U.S. Treasuries\n <\/li>\n
- \n
<\/div>\n Investment-grade corporates\n <\/li>\n- \n
<\/div>\n High-yield corporates\n <\/li>\n- \n
<\/div>\n U.S. Aggregate Bond Index\n <\/li>\n- \n
<\/div>\n Municipals\n <\/li>\n <\/ul>\n\n Source – RBC Wealth Management, Bloomberg; Treasuries represented by\n the Bloomberg U.S. Treasury Index, corporates by the Bloomberg U.S.\n Corporate Bond Index and U.S. High Yield Corporate Bond Index,\n municipals by the Bloomberg Municipal Bond Index; data through 9\/23\/24\n <\/p>\n <\/div>\n <\/div>\n\n \n
Consumer rate implications<\/h2>\n
\n Finally, what do the Fed\u2019s rate cuts mean as a practical matter? As noted,\n Treasury yields have been dropping for months on investor anticipation of\n Fed rate cuts, so as we see it, much of what the Fed does from here is\n simply following through. Put differently, market rates have already\n priced in the bulk of future rate cuts, and consumer rates should\n gradually reflect that in the months ahead.\n <\/p>\n
\n For example, 30-year mortgage rates are essentially priced off the 10-year\n Treasury yield. On April 25, both the 10-year Treasury yield and the\n average 30-year mortgage rate hit a 2024 high of 4.7 percent and\n 7.6 percent, respectively. Since then, each has declined by roughly 90 bps\n to 3.8 percent and 6.7 percent, respectively.\n <\/p>\n
\n So, where might mortgage rates head from here? There are two things to\n consider: the 10-year Treasury yield itself, and the gap between it and\n 30-year mortgage rates, which currently stands at roughly 300 bps.\n <\/p>\n
\n The Bloomberg consensus analyst survey for September now has the 10-year\n yield falling to 3.7 percent by early next year, and toward 3.6 percent by\n the end of 2025. Should spreads stay flat, that would suggest to us that\n mortgage rates might have already reached their near-term lows.\n <\/p>\n
\n But what about spreads? At 300 bps over the 10-year Treasury yield,\n mortgage rates are historically expensive. Prior to the pandemic, that\n spread was closer to 150 bps\u2013200 bps. The reasons are too numerous to\n cover here, but in short, we do see some scope for mortgage spreads to\n compress, particularly if the Fed ceases shrinking its balance sheet, as\n we see as likely later in 2025.\n <\/p>\n
\n If lower yields and narrower mortgage spreads come together, we think the\n next stop for mortgage rates could be 6.0 percent, fading toward\n 5.0 percent later on. But lower rates than that might only come about in a\n recessionary episode.\n <\/p>\n\n \n
Not quite there yet<\/h2>\n
\n The Fed hopes that a series of interest rate cuts will be enough to stave\n off a recession and support a continuation of the economic expansion. But\n it must be said, that\u2019s always how central bankers hope that easing cycles\n play out \u2013 it\u2019s just rarely the case that they do.\n <\/p>\n
\n While we are encouraged by the Fed\u2019s proactiveness and support the view\n that a soft landing remains on the table, we must be cognizant of the fact\n that after an aggressive rate hike cycle, and one which saw about\n 14 months between the last hike and the first cut, the balance of risks\n for the economy is naturally going to be tilted to the downside for some\n time yet.\n <\/p>\n","protected":false},"excerpt":{"rendered":"
The Fed has finally aggressively lowered interest rates. While a steeper yield curve reflects the market\u2019s optimism that rate cuts will shore up the economic outlook, further steepness could be a sign the Fed will cut rates deeply, likely due to a recession.<\/p>\n","protected":false},"author":15,"featured_media":13483,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2024-10-02T09:33:38","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42],"tags":[],"rbcwm_content_owner":[390],"rbcwm_need":[],"rbcwm_segment":[],"rbcwm_solution":[],"rbcwm_topic":[212],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-13482","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","rbcwm_content_owner-pag","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"The Fed has finally aggressively lowered interest rates. While a steeper yield curve reflects the market\u2019s optimism that rate cuts will shore up the economic outlook, further steepness could be a sign the Fed will cut rates deeply, likely due to a recession.","rbcwm_post_author":[92],"rbcwm_custom_breadcrumb_text":"","rbcwm_custom_breadcrumb_link_url":"","rbcwm_disclaimers":{"add_disclosures":["Yes"],"perspective_disclaimer":"","expandable":"","omit_from_pages":[],"disclaimer_footnote":""},"rbcwm_insight_cta_id":[8376],"rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false,"rbcwm_toc_selector":"h2"},"yoast_head":"\n
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