US | Long-term yields edge down on easing bets and risk repricing

Summary

Last week, the Fed resumed its rate-cutting cycle with a 25bp reduction, its first move this year, citing a shift in the balance of risks amid weaker labor market data. It signaled more cuts ahead, with the median year-end rate projection falling after three steady meetings.

Key points

• Key points:
• Even with clearer guidance on further cuts, the current easing cycle is unfolding more gradually than past ones amid lingering uncertainty and resilient domestic demand.
• Long-term yields have fallen more sharply in recent weeks amid expectations of a longer easing cycle, yet they remain well above levels from a year ago.
• The 10y yield’s drop this month reflects a 25bp fall in term premium offsetting last month’s rise. The Q3 adjustment has been just ~10bps, driven by shifting policy expectations.
• Markets are aligned with the two additional 25bp cuts signaled by the median FOMC participant for this year, but expect deeper easing next year.
• Subdued financial volatility and unusually tight corporate bond yield spreads relate to Powell’s remark this week that “stocks are fairly highly valued.”

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