11/8/24: US Fixed Income Markets Face Volatility Amid Election Uncertainty and Fed Rate Cut

Fixed income markets experienced heightened volatility this week as participants were focused on the US presidential election as well as the Federal Open Market Committee meeting. The outcome of the election has injected uncertainty into fixed income markets, influencing interest rates, longer-term inflation expectations and ultimately demand for bonds. If the Trump administration introduces policies that fuel fiscal expansion or increase geopolitical tensions through the aggressive use of tariffs, inflationary pressures could rise, potentially leading to higher bond yields as investors demand greater compensation for inflation risk.

As broadly anticipated, the Fed reduced the Fed Funds Rate by 25 basis points to the range of 4.50 – 4.75%. At the post-announcement press conference, Chair Powell indicated that the Federal Reserve is currently taking a more neutral stance toward the dual mandate of maximum employment and price stability. Economic activity is expanding at a solid pace, while the Fed has gained confidence that the economy is on the path to the 2% inflation target. The Chair also acknowledged the committee is monitoring economic data closely and will exercise optionality when necessary. The Fed believes that following the second rate cut monetary policy is still restrictive. When responding to the election results, Chair Powell stated that in the near-term, the election results will have no effect on monetary policy. He reiterated reluctance to comment on fiscal policy, yet did offer that regardless of the election outcome, fiscal policy is currently on an unsustainable path.

Meanwhile, the US service sector expanded in October at the fastest pace in over two years. The Institute of Supply Management’s Services Index increased to 56, the highest since July of 2022. A reading over 50 indicates expansion, while a reading under 50 indicates contraction. Earlier in the week, Durable Goods Orders which are items meant to last at least three years fell 0.8%. The decline was primarily a result of a drop in bookings for commercial aircraft which more than offset an increase in orders for business equipment.

This morning’s University of Michigan Sentiment Index came in at 73.0 for November, which is a seven-month high and an improvement from 70.5 in October. The 1-year inflation outlook eased to 2.6% from 2.7% in the previous report. Long-run inflation expectations moved slightly higher, up from 3.0% last month to 3.1% this month. Sentiment has been on a broad upward trajectory since the height of inflation in mid-2022.

US Treasury yields have returned to recent ranges following a two-day post-election whipsaw. The 2-year US Treasury at the time of this writing is trading at 4.23%, up about 2 basis points, and the 10-year at 4.30%, lower by about 8 basis points. Moving forward into year-end, the Chandler team still expects the Federal Reserve to adjust their policy stance to become less restrictive. Nevertheless, the election outcome underscores the importance of monitoring future policy announcements in managing risk.

Next week: MBA Mortgage Applications, Consumer Price Index (CPI), Producer Price Index (PPI), Retail Sales, Import Price Index, Export Price Index, Industrial Production, Capacity Utilization

© 2024 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.