You can still earn more than 4% purchasing a 30-year Treasury. This may sound paltry compared to the 2024 high of 4.75%, or even more paltry than the 5.10% peak in 2023. Just do not forget that all you could get from the 30-year Treasury’s “Long Bond” was about 2.00% at the start of 2022. The cold hard reality for investors today is that there may be only a very short window remaining to buy a 4% long-dated Treasury for quite some time.

Interest rates heading lower will be good for borrowers, the housing market, and business owners. That will be at the expense of those who want to save by buying bonds. And those who did not lock in their higher bond yields in prior months or in the coming days for a 4% long-dated Treasury may not get the chance again for some time. Keep in mind that there were only a few brief instances from 2014 to 2022 when the 30-year was even above 3.00%. And for those who invest in dividend stocks, bonds and commodities, this relative yield could be a significant benchmarking issue for many years ahead.

The United States economy and the investing community experienced the harshest interest rate cycle of a generation with 11 rate hikes taking place from March-2022 to July-2023. Jerome Powell’s slowness of moving to undo those rate hikes with rate cuts has been disappointing to many economic participants like investors, borrowers and business owners.

BOND MARKET PREDICTIONS

While the shortest 1-month and 3-month T-Bills still offer yields above 5% as of today, that’s all going to change if the Federal Reserve finally delivers on its long-overdue interest rate cut in February. The current Fed Funds target is 5.25% to 5.50% and the CME FedWatch Tool is factoring in a 73.5% chance for Fed Funds to be cut by 25 basis points in September. It’s also pointing to a 26.5% chance that there will be a 50 basis point cut in September.

If history is any barometer for future actions, interest rates should start to go even lower after September as well. And the CME FedWatch Tool confirms this theory as the December contracts show a 32.4% chance that Fed Funds will be in a 4.50% to 4.75% range and a 44.5% chance that the funds rate will be down in a 4.25% to 4.50% range. If this all pans out, a big “if” under Jerome Powell, then short-term interest rates will be 75 or 100 basis points by the end of 2024.

Now look out a full year. All other CME FedWatch Tool probabilities show 5% or lower odds for other rates, but this is the current chance of rates being far lower with the highest chances of rates looking as low as 3.00% and as high as 3.50% — roughly 2 full percentage points under the current Fed Funds range. Here are those odds:

• 2.75% to 3.00% … 16.6% chance
• 3.00% to 3.25% … 28.5% chance
• 3.25% to 3.50% … 28.2% chance
• 3.50% to 3.75% … 15.4% chance

You should always keep it tucked deep into your memory banks that Fed Funds futures are using real money but they also gyrate with every market sentiment change. The odds can also change with each and every economic report. The indications at the end of 2023 and start of 2024 were blinking bright green that interest rates would have already been lower long before the present day. Instead, Jerome Powell and his voting FOMC members have been holding out for inflation to get back down in a 2.0% to 2.5% range.

The CME’s FedWatch Tool’s daily and weekly gyrations prove one mantra of Tactical Bulls — the Efficient Market Hypothesis is not efficient nor is it a viable theory.

RATES NOW & LOOKING FORWARD

While there are no guarantees at all that 30-year Treasury Bond rates come back under 4.00% in the immediate future, the 10-year Treasury Note offers some insight. After peaking at about 5.00% in 2023 the current yield for a 10-year Treasury is down to 3.86%. Even the 5-year Treasury Note peaked above 4.9% in late 2023, but that yield is now down to 3.73%.

If short-term rates do come down handily as expected then the dreaded “inverted yield curve” will change, so short-term rates won’t be higher than long-term rates. That assumes that investors do not overly commit to long duration Treasuries in the 10-year to 30-year maturities. And if that yield curve inversion goes away then many of the current recession fears may have passed as well. Now we just have to consider that the reversal of an inverted yield curve might not be a very steep yield curve at all.

HISTORY & DEPTH OF MODERN-ERA RATE CUTS

As far as what to expect, assuming there is no crisis. Here are some scenarios to consider about past rate cut cycles (in basis points):

• The 2020 COVID-19 crisis brought 2 rate cuts (50 and then 100) from 1.00% to 1.25% down to the 0.00% to 0.25% all over again.
• The 2019 mid-cycle rate cuts saw 3 cuts (all 25 each) from a 2.00% to 2.25% range going down to 1.50% to 1.75%.
• The 2008 rate cuts to fend off the Global Financial Crisis were 3 rate cuts (50, 50, then 100) down to the 0.00% to 0.25% range.
• The prior rate cut cycle from 2007 into the first half of 2008 during the housing market crash was 7 rate cuts (50, 25, 25, 75, 50, 75, 25) from 4.75% down to 2.00%.

THE GOVERNMENT’S CONFLICT OF INTEREST

It seems prudent to not expect that the Federal Reserve’s interest rate cycle will completely reverse the last 11 interest rate hikes. Then again, the belief of Tactical Bulls is that almost every government in the world that has high rates now needs to get their own rates across all or most maturities back under 3.00%. Tactical Bulls even believes that central banks, particularly the U.S. Federal Reserve, has a direct conflict of interest keeping interest rates higher. After all, the Federal Reserve is forcing the Treasury to pay more interest now than the market indicators are predicting for interest rates in the short-term and intermediate term.

Another reason that Tactical Bulls believes the Fed must lower rates, even if it prefers not to, is that none of the major governments can afford to service bloated debt servicing costs. This view from FiscalData by the U.S. Treasury for 2024 (knowing 2025 is already set up to look worse in debt servicing) ranked in order of the portions:

• 22% Social Security ($1.21 Trillion)
• 14% Net Interest ($763 billion)
• 13% Health ($743 billion)
• 13% Medicare ($721 billion)
• 13% National Defense ($715 billion)
• 10% Income Security ($566 billion)
• 5% Veterans Benefits and Services ($264 billion)
• 4% Education, Training, Employment, Social Services ($243 billion)
• 2% Transportation ($105 billion)
• 1% Community and Regional Development ($78 billion)
• 3% Other ($190 billion)

NOW THINK GDP GROWTH VS. DEBT GROWTH

Now let’s all consider the total U.S. GDP and the total outstanding debt to the penny. Current‑dollar GDP at the end of Q4-2023 was $27.94 trillion, up 4.9% or $334.5 billion from a year earlier. The U.S. Treasury data showing the debt to the penny as of August 20, 2024 was $35.2 trillion, up 7.6% from the $32.7 trillion a year earlier.

Compared to the federal spending of $5.3 trillion for the same period a year earlier (Oct-2022 to Jul-2023) federal government spending has increased by $299 billion. And there is no domestic crisis facing the nation at this time.

AND ON DIVIDEND COMPS

And let’s not forget about comparing the 10-year Treasury note at 3.86% today against stock dividends. The 10-year is often benchmarked against the S&P 500 dividends, particularly for sectors such as utilities, financial, energy, industrial, and REITS. The S&P 500 dividends can be a tad tricky because its market cap-weighting and dominance by mega-cap tech stocks means the total index yield is low. The “SPY” ETF shows a dividend yield of about 1.23% (on FinViz) and about 1.36% (SSGA). Here are the yields of the top sector ETFs weighted heavily by dividends:

• The Financial Select Sector SPDR Fund (XLF) 1.49%
• The Industrial Select Sector SPDR Fund (XLI) 1.44%
• The Utilities Select Sector SPDR Fund (XLU) 3.01%
• The Real Estate Select Sector SPDR Fund (XLRE) 3.31%
• The Energy Select Sector SPDR Fund (XLE) 3.14%

There are currently 92 members of the S&P 500 that pay no dividend at all. That number seems to keep shrinking, but there are 408 dividend-paying members of the S&P 500. The mid-point of all S&P 500 dividends (including the non-payers) is 2.05%. If you back out the non-dividend members of the S&P 500’s 408 companies then that median yield is about 2.5%. And the median yield of the top 20 dividends in the S&P 500 is about 5.4%.

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How each investor chooses to invest their hard earned dollars is up to them and their financial advisors. No data and information within this outlook is intended to be investment advice and should not be taken as a recommendation to buy or sell any securities. Investing in stocks does n0ot come without risk, and even bond investors sometimes manage to lose money in their investments.