Treasury yields (^TYX, ^TNX, ^FVX), in particular the 10-year note, have seen serious upsides as the Federal Reserve opts to keep interest rates higher for longer in the first half of 2024. UBS Global Wealth Management Head of Taxable Fixed Income Strategy Leslie Falconio joins Yahoo Finance Live to discuss fixed-income investment strategies amid the current rate environment.
"I really think now the focus is going to be on the other side of the [Fed's] mandate, which is on the growth side. And our expectation is that throughout the year, although it remains above trend... growth will slow, and that's what we believe," Falconio explains. "So to us, it really doesn't matter whether the Fed cuts in June or July, 75 or 50 [basis points], as long as they cut this year, and as long as inflation is not priced in, then we think that 10-year yield will trend lower around that 3.75% level."
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MADISON MILLS: Hire for longer seems to be the name of the game lately. The likelihood of rates staying higher for longer pushing the 10-year Treasury yield to its highest since late November, as traders start to reassess the possibility of the Federal Reserve's timing of rate cuts.
We're going to break down the latest moves in treasuries with Leslie Falconio, Head of Taxable Fixed Income strategy at UBS Global Wealth Management.
Leslie, thanks so much for being here to talk about all things treasuries with us. As we were mentioning, yields are hitting 2024 highs. Equities still roaring ahead today. What are yields trying to tell us about the economy that equities might be missing?
LESLIE FALCONIO: Well, listen, I think it really depends on what's driving those yields, whether it's inflation or growth. And let's be honest, growth has been strong. It will be strong in the first quarter.
We have GDP now close to that 2.8%. We had a strong payroll report on Friday. So the fixed income market is forward looking. But now, that we have a market correction, which, by the way, we anticipated heading into the year.
We, definitely, felt that the market was pricing in much more of an overzealous Fed, meaning, they had a cut in March. They had about 160 basis point cut throughout the year.
Now, they're back to 100% in September, like, a 90% July. But it's the amount of cuts. It's only about 63 basis points now. So you're now actually less than what the Fed projections dictated in the March FOMC.
So we do think around this 446, 450 level is actually a great time to buy and lock in for the long-term.
SEANA SMITH: When it comes to some of the movements that you're expecting to see after we potentially hit up above some of the resistance that the 450 level, what is going to be the catalyst to trigger that move?
And I guess, when we talk about the downside here, at least, for yields, what do you think that looks like?
LESLIE FALCONIO: Well, when we think about-- what could trigger the market moving higher. Listen, we have CPI on this week. But, honestly, everyone knows the measuring or the lack of correct measurement when it comes to owners equivalent rents and the actual rent.
So everyone expects that to converge. Obviously, we have to deal with oil prices going up. And if there is a reflation for an oil price to stay higher for a sustained period of time, that could be an issue.
But I really think now it's the focus is going to be on the other side of the mandate, which is on the growth side. And our expectation is that throughout the year, although, it remains above trend, growth will slow. And that's what we believe.
So to us, it really doesn't matter, whether the Fed cuts in June or July, 75 or 50, as long as they cut the share and as long as the reflation is not priced in, then we do think that 10-year yield will trend lower probably by the end of the year around that 375 level.
MADISON MILLS: So what should investors be doing right, now, then, Leslie? If they're listening to this segment, should they be getting in on the end of the curve today?
LESLIE FALCONIO: You're never going to pick the top. But we went to a 446 in 10-year yield. That's really close to the 4.5%. And locking in at that level, what we call positive convexity in the sense that the amount of yield that you're locking in and earning creates such a cushion to the investor.
That if we go anywhere near that 375 at the end of the year in 10-year yield, you're looking at a double-digit total return. Well, if we go up another 50 and another 60, you might be flat in 10-year Treasury yield total return, because of that income that you're earning.
So it's really skewed to the positive side. And, again, it's not just-- if the Fed cuts in 2024, then they're done. They're going to cut in 2025, as well, although, we are of the belief that neutral rate, if you will, is much higher than the 2.5% that the Fed is projecting, maybe, at 375.
But the market's really putting in a lot of bearish sentiment. So we do like locking in terms of higher quality, treasuries, agency, MBS, some Ig for the carry and the potential price appreciation, but spreads overall in fixed income have had an incredible 3 and 1/2 month run. And spreads, overall, are pretty tight. It's yields that are on the cheaper side.