After more than a year of aggressive hiking, the Fed hit the pause button during the September, October, and December meetings. This brought the target rate to 5.25-5.50% as of 12/31/2023. The noteworthy development in the 4th quarter was a pivot in the tone of the FOMC. In September and October, their commentary centered around a “higher for longer” rate policy. However, the December commentary became markedly more dovish and opened up the possibility for three cuts in 2024. The markets are pricing even more than 3 cuts, with futures contracts pricing in as many as six 0.25% rate cuts by the end of 2024. As Brad and Chris both mention, this created favorable market conditions for stocks as well as alternative currency investments – both asset classes saw end of year rallies.
Against the backdrop of a shifting Fed, the 2-year Treasury declined 79 basis points (bps) in the 4th quarter to end the year at 4.25%. The 10-year Treasury rate started the quarter at 4.57% and went as high as 4.99%, where it peaked on 10/19/2023. From that peak, the yield declined 111 bps to end the quarter and year at 3.88%. This decline is comparable to that of the 2-year, leaving the spread between the two effectively the same.
Against the backdrop of a shifting Fed, the 2-year Treasury declined 79 basis points (bps) in the 4th quarter to end the year at 4.25%. The 10-year Treasury rate started the quarter at 4.57% and went as high as 4.99%, where it peaked on 10/19/2023. From that peak, the yield declined 111 bps to end the quarter and year at 3.88%. This decline is comparable to that of the 2-year, leaving the spread between the two effectively the same.
To have success in investing, you often have to be able to separate the signals from the noise. Despite all the noise we saw in 2024, the 10-Year treasury began and ended 2023 at the exact same rate and the longer-term Treasuries were also little changed. In the last bulletin, we discussed taking advantage of signals in the fixed income market by adding to longer-term, high-quality bonds. We began purchasing the TLT iShares 20+ Treasury Bond ETF for some portfolios during the 4th quarter. This helped portfolio returns as TLT is up 12.57% over the last 3 months. We anticipate rate cuts to be a positive tailwind for this and other bond funds moving forward. Thus, we continue to recommend an overweight to bonds.