By Simon White, Bloomberg Markets Live reporter and strategist
The rally in Treasuries is beginning to look tired. Yields are moving in lock-step with short-term rate-cut expectations, which are looking overcooked given the loosening in financial conditions has likely helped push the timing of the next NBER recession further out.
Treasuries are becoming progressively overbought after an impressive rally of over 5% since mid-October. The rally was not unexpected as it came off oversold conditions, but the pendulum has, as usual, swung too far in the other direction, where the drop in yields is hard to square with economic expectations.
The Treasury rally has been augmented by the Federal Reserve opening the door to rate cuts next year. Longer-term yields in theory should factor in the short-term rate cycle as well as future rate cycles, and other longer-term risks such as inflation.
In practice, though, longer-term yields move almost in lockstep with shorter-term rates. The chart below shows the very close relationship between the December 2024 SOFR and the 10-year yield. The correlation between the two is 80% (for a correlation of daily changes, that’s high).
Yields have fallen…
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