"Bond Guardian" dominates the market? The outlook for Federal Reserve interest rate cuts faces challenges

According to analysis by Yardeni Research, as the U.S. election day and the Federal Reserve's interest rate decision approach, "Bond Vigilantes" (referring to investors who aim to push up market interest rates by selling bonds to force the government to restructure its fiscal order) seem to be dominating market trends.

According to FactSet data, although U.S. Treasury yields fell on Monday, the 10-year Treasury yield remains above its 200-day and 50-day moving averages, having surged significantly in October. As of the last statistics, the 10-year Treasury yield dropped about 6 basis points to approximately 4.31%.

In a report on Monday, Yardeni noted, "The Bond Vigilantes are back, threatening to push the 10-year Treasury yield up to 5%, which may alert members of the Federal Open Market Committee (FOMC)."

The Federal Reserve will begin a two-day monetary policy meeting on November 6 and plans to announce its interest rate decision on November 7. This announcement comes just two days after American voters cast their ballots for the next president on November 5.

Yardeni pointed out that the bond market seems to be ignoring factors that typically suppress rising yields. He mentioned last week's data, which included a year-on-year decline in inflation for September and employment growth and manufacturing activity in October that fell short of expectations.

"Investors seem more focused on the upcoming fiscal and monetary stimulus, while the current economy does not need these measures," Yardeni said. In addition to the Federal Reserve's impending monetary policy decision, bond market investors are also concerned about "more fiscal overspending that a new government may bring."

Yardeni remains "optimistic" about the economic outlook, believing that despite the slowdown in employment growth in October, the overall labor market is performing well. The U.S. Bureau of Labor Statistics mentioned in last Friday's October employment report that disruptions caused by hurricanes affected employment data.

Yardeni's report indicated that the recent rise in bond market yields is "self-tightening the economy." He stated, "The bond market is likely to offset the impact of another rate cut," as the bond market believes the Federal Reserve is cutting rates too much and too quickly, thereby raising long-term inflation expectations.

"This rise in expectations is due to concerns about more fiscal overspending that a new government may bring," Yardeni mentioned, showcasing the bond market's measures of inflation in the report At the same time, investors generally expect the Federal Reserve to announce a 25 basis point cut to the benchmark interest rate on November 7, targeting a range of 4.5% to 4.75%. According to the CME FedWatch Tool, as of Monday afternoon, the federal funds futures market assigns a 98% probability to a Fed rate cut.

The Federal Reserve began a new round of rate cuts in September, which was the result of its last policy meeting. Yardeni stated, "Investors often hear 'don't fight the Fed,' but perhaps now is the time for the Fed not to fight the bond vigilantes."