The market is 50/50 on whether the Federal Reserve will be done with rate hikes this year, but we are most likely near the peak. In this context, all eyes are on bonds and what could be a rare opportunity to obtain 4.5% on 10-year bonds.
Is it time to buy?
Today, Deutsche Bank notes that history suggests that the timing of the latest rise normally coincides very closely with the peak of the 10-year Treasury yield for the cycle.
There is only one cycle in which 10-year yields peaked significantly higher several months before the last rally, and two others where events were much milder. The extreme was the 1984 cycle, where the high was 83 days before the last Fed hike, while it was +138 basis points above its level on the day of the last Fed hike. Fed. The other two occurred in 2018, when the peak was +48 basis points higher 31 days before the last increase, and in 1995, the peak was +37 basis points higher 86 days before the last increase. Keep in mind that these three cycles were more preemptive upcycles than response cycles to more pressing imbalances (e.g. inflation) in the economy.
Of course, a lot of this depends on whether or not we’ve seen the last rise of the cycle. The Fed is highly unlikely to hike next week, but it is also unlikely to delay the final hike on its dot chart until 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 rise in the cycle is around the time when yields are more likely to hit their highs than any other.
Lower yields will be a tailwind for gold, which is up $17 today. Looking at price action over the past few weeks shows that a peak could be near. We had a series of strong US economic data, but we failed to surpass the August high of 4.36%.
Of course, implicit in all this is that the Fed has indeed peaked. Parts of the market are trading as if a “no landing” scenario were to occur and if that were the case then the Fed could return to further rate hikes in 2024. This would come as something of a shock to the market, but could lead to an explosion in prices.