The market has been on high alert for signs of activity from the Fed — no, not those Feds, the Federal Reserve. After months of anticipation, the Fed finally delivered the first of several expected cuts to America’s headline interest rate, but skeptical investors are signaling that the Fed’s honeymoon period with the market might be over.

Bonding exercise: When yields go down, bond prices usually go up. This dynamic led investors to buy government bonds in anticipation of the Fed’s rate cuts, hoping that rising bond values would offset the drop in yields. Between the start of August and Aug. 26, the Financial Times observed that the largest ETF tracking long-dated Treasuries, the iShares 20+ Year Treasury Bond ETFTLT

, pulled in over $4B in inflows, marking its best three-month period since launching in 2002. But a month after the Fed’s super-sized 0.50% cut, things haven’t gone exactly as planned.

• Since bottoming at 3.6% in mid-September, bond yields have climbed again — with the 10-year Treasury yield rising back to 4.2% as investors absorb new economic data and the upcoming election.
• The repricing of Treasuries reflects greater risks — like inflation and potential policy shifts after the election — and suggests investors think the Fed may move slowly on further rate cuts.

Changing the Narrative

The recent increase in yields broke the S&P 500’s six-week winning streak and took a bite out of the Russell 2000, with both indexes down 0.77% and 2.9%, respectively, last week. That’s because stock prices are directly impacted by rate expectations, which set the “risk-free return” in the market. Many investors are now left considering what’s next.

• A growing number of analysts believe the Fed’s September forecast — projecting median interest rates to end 2024 at 4.4% — might have been too aggressive, with some doubting any cut in November.
• However, on the prediction platform Polymarket, bettors are still wagering on a 0.25% cut at the Fed’s Nov. 7 and Dec. 18 meetings, leaving the rate range at about 4.25%-4.50% — slightly better than the Fed’s projections in September.

Savers sidelined: Meanwhile, savers, with a record $6.51T in money-market funds, have been holding off on buying longer-dated bonds, according to Bloomberg, as many feel it’s safer to wait. The latest bond market volatility also serves as a nice “heads up” for investors as we barrel towards the US election next week, which could bring added market turbulence, with results potentially taking days to report.