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Today’s retrospective on rates:
The tug and pull between the Federal Reserve’s monetary policy stance and our governments fiscal policy adjustments post-election cycle have created a whipsaw of a chart for yields. Combine that with a slew of economic data and investor confidence measures and it creates a propensity for volatility in the product.
On May 16th investor confidence was tested as Moody’s Corporation, a financial services company that provides credit ratings, lowered America’s sovereign debt rating from Aaa to Aa1 citing rising net interest costs, looming tax cuts, a growing debt pile, and political gridlock. U.S. Treasury Secretary Scott Bessent made an appearance a few days later to call Moody’s a “lagging indicator.” Bessent has been a long-time proponent of rate cuts as he believes lower rates creates opportunity for economic stimulus.
He argues that the market is pricing in rate cuts by making a comparison of the federal funds rate versus the 2-year yield. For perspective, the federal funds rate is the interest rate at which banks lend to each other overnight and it’s a key indicator of monetary policy set by the FOMC (Federal Open Market Committee). The 2-year treasury yield is currently trading below the fed funds rate.
Over the weekend, we recently saw volatility in yields as U.S. President Donald Trump announced he would delay the implementation of a 50% tariff on goods from the European Union. The European Central Bank (ECB), which covers monetary policy over the Eurozone, has cut interest rates 7 times in a row. These rate cuts have ironically led to strength in the Euro versus U.S. dollars (EUR/USD). Traditionally, higher rates lead to a strengthened local currency as investors flock to buy the bonds with the higher yield. In the case of EUR/USD we notice the inverse. As U.S. yields trend higher, the dollar index ($DXY) has weakened and as ECB continues down its rate cutting path the Euro has strengthened.
President Trump has been critical of the Fed and its chairman Jerome Powell with their “lack of action” regarding rate cuts. The FOMC has kept their target range unchanged at 425-450 basis points for the third consecutive meeting. Powell has made comments recently on his reliance on economic data to frame decision-making ultimately to service the Fed’s dual mandate of maximum employment and price stability. Powell has taken the slow, cautious approach citing a period of economic uncertainty as tariffs could impose increased supply shocks to the global economy.
There are seven Federal Reserve officials who believe these cuts will come during the back half of the year with the average consensus being two cuts. According to the CME Fedwatch tool for the June 18th meeting, there is a 94.4% chance to keep the current target range (425-450 bps). If we look out to December 2025, there is a normal distribution curve but the expectation is 39.3% chance of 375-400 bps for the target range signaling the market agrees with those seven Federal Reserve Officials.
The Micro 10-year yield futures (/10Y) currently sits at 4.444 but has trended higher since the beginning of April. Being sensitive to the macroeconomic and political landscapes, we’ve seen yields pull back since the pause of the additional 50% tariffs on the European Union. The yield future is currently trading above all three Simple-Moving Averages (50-day SMA, 100-day SMA, 200-day SMA) and is sitting slightly above neutral for the 14-period Relative Strength Index with a reading of 52. According to the CFTC Commitment of Traders report published May 20th, there is little interest for yield contracts. Open interest currently sits at 4001 total contracts and has been reduced 740 contracts week over week. Dealers/Intermediaries and Asset manager/institutional do not hold positions in this contract while leveraged funds are overwhelmingly long at 3299 total contracts.
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