Janney Montgomery Scott chief fixed income strategist Guy LeBas joins Market Domination Overtime to discuss how the Federal Reserve’s interest rate cut will weigh on the bond market (^TYX, ^TNX, ^FVX). LeBas notes that the size of the Fed’s first interest rate cut matters for the bond market, explaining: “We could see a Federal Reserve which comes out with a 25-basis-point rate cut but emphasizes the possibility, maybe even the probability, that over time they could cut at a more accelerated pace… Were that to happen, we’d see… this one rate cut done, perhaps on the hawkish side, but the future would end up pricing each additional FOMC meeting with a roughly fifty-fifty chance of 25 basis points, or 50 basis points, and it would end up being a dovish 25 as opposed to a hawkish 50, in which there’s a cut and a more gradual expected path.” While many rate easing cycles end in an economic downturn, LeBas is “not convinced” that will be the case this time around. “I think today we start in a circumstance in which we’re much further away from neutral interest rates than in any of those periods. So more likely than three, we get four or five. But so long as economic growth holds up, if we get four or five 25-basis-point rate cuts in the next two to three quarters, that’s a pretty healthy situation,” he tells Yahoo Finance. As the easing cycle kicks off, LeBas sees the yield curve steepening. He adds, “Based on how far the front end of the yield curve, call it the, you know, the two-year portion of the yield curve, has fallen, any more steepening from here realistically is it going to require ten-year yields TNX (^TNX) or the longer portion of the yield curve to rise. And that only really comes alongside a little bit of a reflationary impulse.”
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