We offer a highly abridged version of the research that goes out to our clients via The Observatory, as we think it can offer some value to the broader community. In this note, we focus on the drivers of treasury bonds.
Labor market conditions remain largely positive, though cyclical drivers of slowing conditions continue to manifest. These dynamics create conditions that favor a decelerating expansion rather than further acceleration.
At the same time, inflationary pressures remain neutral, suggesting a continuation of the current trend.
Coincident with these fundamental conditions, bond markets are pricing five cuts over the next eighteen months.
In past cycles, we have largely seen such cuts realized only around recessions.
For now, neither labor markets nor inflationary conditions do not justify the cuts priced into short rates. This dynamic remains a headwind for fixed income.