I continue to believe that the main driver of the bond crunch in the past few weeks is the market pricing in a higher-for-longer Fed scenario and a new regime where US rates range from 3-6% in the cycle.
Along those lines, I'm carefully watching what the market is pricing in for rate cuts next year. The Fed dots for next December range from 4.25%-6.25% with a cluster around 5%. The bond market is moving ever-closer to that with just 59 bps of cuts priced in now and a year-end 2024 Fed funds rate of 4.73%. That's down from +80 bps a month ago.
What could lead to a further step change in that is a November hike or signal that a November hike is coming. The Fed's Mester said she would support a Nov hike today but it's priced at just 30% with around a 50% chance priced in for December.
But more than the 2024 dot, I think the market is moving the 'long run' dot higher.
