The market is 50/50 on whether the Federal Reserve is done with rate hikes this year but we’re very likely close to the peak. With that, eyes are on bonds and what might be a rare opportunity to get 4.5% in 10-year notes.
Is it time to buy?
Today, Deutsche Bank notes that history suggests that the timing of the last hike normally coincides very closely with the peak in the 10yr Treasury yield for the cycle.
There is only one cycle where 10yr yields saw a notably higher peak several months before the last hike, and two more where there were much milder occurrences. The extreme was the 1984 cycle where the high was 83 days before the last Fed hike, when it was +138bps above where it was on the day of the last Fed hike. The other two were in 2018, when the peak was +48bps higher 31 days before the last hike, and in 1995 the peak was +37bps higher 86 days before the last hike. Bear in mind that all three were more pre-emptive hiking cycles rather than those responding to more urgent imbalances (e.g. inflation) in the economy.
A lot of course depends on whether we’ve seen the last hike in the cycle. The Fed are highly unlikely to hike next week but are also unlikely to take the last hike out of their dot plot for later in the year. So we won’t know for some time whether this is the peak or not. However, history tells us that on average, the last hike of the cycle is around the time that yields are more likely to hit their highs than any other.
Falling yields will be a tailwind for gold, which is up $17 today. Looking at price action in the past few weeks, underscores that a top might be near. We’ve had a series of strong US economic data points but haven’t been able to break the August high of 4.36%
Of course, what’s implicit in this is that the Fed has actually reached a peak. Parts of the market are trading as if there will be a ‘no landing’ scenario unfold and if that’s the case, then the Fed could revert to more hikes in 2024. It would be something of a shock to the market but might lead to a blowout in rates.