The market anticipates some big movesAs Morgan Stanley Wealth...

The market anticipates some big moves

As Morgan Stanley Wealth Management chief investment officer Lisa Shalett points out, bond markets have moved violently in the September quarter, with the two-year US Treasury bond yield falling from 4.75 per cent on June 30 to 3.55 per cent, clearly anticipating the start of the Fed’s rate cutting cycle.

Shalett says quarterly moves of this magnitude are rare and have been most recently seen in 2001, 2008 and 2020 – and we know what happened in all of those years.

“While anticipatory rate moves are not unusual, this one has been noteworthy for its speed and depth,” she says.

The difference between the two-year bond yield and the Feds Fund rate has gotten as large as 1.8 per cent, the widest since 2008. And the moves in the Fed Funds futures market have been wild, with rates now tipped to fall by as much as 2.5 percentage points by next December.

Shalett says that’s a “pace and amount that has only been associated with a Fed ‘behind the curve’, coinciding with recession”