Oh oh oh. Merry ChrisWaller! Oh oh oh. Merry ChrisWaller! Oh oh oh. Merry ChrisWaller!

Oh oh oh. Merry ChrisWaller!

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Dovish Federal Reserve members’ speeches trump a weak 7-year auction as the market believes inflation is over. Waller's remarks suggest Fed members’ focus is gradually shifting from inflation to growth, building the case for a bull-steepening of the yield curve. However, challenges remain as fiscal pressures imply larger coupon issuances next year. The divergence in the forward outlooks of the dot plot and bond futures brings into focus the December Fed meeting and a new dot plot.

Yesterday's Waller speech gave markets confirmation that the Federal Reserve might not be, after all, putting inflation at the forefront of its monetary policy decisions. Indeed, he affirmed that rate cuts might occur much earlier than the 2% inflation target has been achieved:

Fed governor Chris Waller said that if inflation cools “for several more months — I don’t know how long that might be — three months, four months, five months — that we feel confident that inflation is really down and on its way, you could then start lowering the policy rate just because inflation is lower.”

That opens the way for a bull-steepening of the yield curve because the next most likely Fed's rate move is a cut rather than a hike.

Surprisingly, a soft 7-year auction tailing 2.1bps amid a bond rally, with primary dealers being awarded 20.3%, the highest in a year, did little to deter bond bulls despite fiscal pressures.

Consequently, the yield curve bull-steepened with the 2s10s spread ending 10bps wider by the end of the day.

As my colleague Kim explains, the yield on the 10-year US Treasury broke below the key support level at 4.36%, and the RSI closed below 40. There is now downside risk to support at around 4.07%. For 10-year yields to reverse to an uptrend, they must close above 4.52%.

Source: Saxo platform.

The Bloomberg US Treasury aggregate index shows that treasuries are up roughly 3.4% in November, the most since August 2019, when the Federal Reserve made a U-turn on quantitative tightening (QT) and cut interest rates. Before that, Treasuries rose by 3.4% in 2008 during the month of December amid the global financial crisis.

What's different today from 2008 and 2019 is that the performance of treasuries is merely driven by speculation. Markets are betting that inflation will revert to 2% and that the Federal Reserve will cut rates aggressively. If this doesn't happen, that could be a setback for US Treasuries.

Source: Bloomberg.

What’s next? Inflation data and dot plot.

Bond futures are now pricing slightly more than four rate cuts by the end of 2024 and three in 2025. These expectations are in contrast to what the latest dot plot shows. The median of FOMC members sees only two rates cut for 2024 and nearly five for 2025. If FOMC rate cut expectations move from 2025 to 2024, it will further the case for a steeper yield curve and lower yields.

Before that, PCE data tomorrow are in focus, and lower-than-expected inflation figures could also add to the current bullish sentiment of bonds.

Although this might be the beginning of a bond bull market ahead, it's crucial to recognize that challenges remain:

  1. Fiscal policy will continue to pressure treasuries as net duration supply is expected to increase in 2024.
  2. Progress on the inflation front might stall. Current market pricing relies on the fact that inflation is over. Even a slighter-higher-than-expected inflation figure can surprise markets.

However, as we have seen yesterday, a weak 7-year auction was trumped by dovish Fed talks. Therefore, duration will likely continue to outperform as long as inflation gets to comfortable levels and the economy cools.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992