Live Markets: Why US bonds could fall despite looming Fed cuts

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05/09/2024 17:36

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    WHY US BONDS COULD FALL DESPITE LOOMING FED CUTS
    Conventional wisdom suggests that with the Federal Reserve
set to cut interest rates this month, U.S. Treasuries are also
poised for a big rally, meaning lower yields. But according to
Jay Kaeppel, senior research analyst, at research firm
SentimenTrader, investors should hold fire before jumping on the
bonds bandwagon.
    So far this year, the benchmark 10-year yield  US10YT=RR 
has fallen 11.6 basis points.   
    Kaeppel writes in a research note that there are plenty of
reasons not to go with the trend, noting that "the big picture
for interest rates is unfavorable." His technical charts project
a generally rising rate environment until 2040. 
    He notes that yields tend to move in "very long-term waves"
and identifies a 60-year cycle, with about 30 years of falling
rates followed by another 30 years of rising rates. He points
out that the latest rates cycle bottomed out in 2010 and
currently we are in the midst of a rising rate environment.
Within that cycle, however, are minor dips that are expected in
a long-term trend.
   "This cycle is by no means 'exact'," Kaeppel writes.
"Interest rates did not bottom out until 2020, and there is no
'guarantee' that rates will rise until - nor top out in - 2040.
Still, if this chart tells us anything, it is that interest
rates may be more stubborn to sharp declines than most investors
currently think."
    Kaeppel also cites his very own JK Bond Cycle Thermometer
and Bond Cycle Model, which he says are flashing bearish signs. 
These models, he adds, are based on long-term cycles in interest
rate trends. The good news, he says, is that they have a solid 
track record in backtesting. But the bad news is that they are
not very price-dependent and so if bond prices show a meaningful
rising-price trend, these models can sometimes fail to keep
track. 
    That said, Kaeppel points out that both indicators are
flashing unfavorable signs for bonds. His models have a win rate
of 31% a year later, following previous zero readings. While
that does not guarantee that bond prices will fall in the next
six to twelve months, they do provide an objective warning sign,
he says.
    "With the caveat that these models could be proven wrong at
any given time, they stand objectively against the current
bullish crescendo for the inevitability of higher bond prices,"
Kaeppel writes.

    (Gertrude Chavez-Dreyfuss)
    *****

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