Market is already pricing out most cuts: Strategist

The move today coming amid several bearish calls on the bond market, with ING forecasting the 10-year yield could rise to 5.5% by the end of the year. You've got T. Rowe out with the scenario, and Nicole saying that there is a potential in the realm of possibilities that maybe we could even see 6% on the 10-year yield. So here to break that all down, where we're headed next, we wanna bring in Leslie Falconio. She's the head of taxable fixed income strategy at UBS Global Wealth Management. Leslie, it's great to have you back here on Yahoo Finance. So we certainly are seeing a push even higher here in yields on the back of this morning's very strong job spread. I think the next milestone that investors are closely watching is that 5% level for yield. Is that likely coming in the next couple of weeks? Oh, you could absolutely see that 5%. I mean, that 501 was the October 23 high, we're 25 basis points away from that. We have inflation numbers coming out next week, and still a lot of unknown in terms of policy. So seeing that 5501 is definitely attainable, but we just don't believe it's sustained. And some of the reasons why we don't think it will be sustained is that when we look at what's happening such as 10-year real yields at a 235, they're about 15 basis points below the high that we saw in October of two and a half. And at that point, I think in that over 5%, even if it is on like strong payroll, like we saw today, we think risk assets start to get a little bit nervous. So you could see 5%, you could see 510, but the question is whether or not it's sustainable. We just don't believe that it will be. What level is sustainable? You know, we still think, look, we think growth is going to be trend down, but remain above trend, right? So we still think growth is gonna stay strong. Obviously today's employment with 256, it's the highest we've seen since March of 2024, and around the 48th consecutive positive number that we've seen. So the economy is strong, but we do think over time, you know, growth will start to slow, but stay above trend. But we also believe that over time, inflation is gonna come down as well, simply because our expectation is that things like owner equivalent rent will start to trend lower. So we have strength, we have, you know, a strong economy. We just don't think you're going to, you know, be at a five or 510, particularly since now the market is already pricing out most cuts. It's down to only one cut in 2025 later in the year in September. So the question of whether or not they're going to pause or not really isn't a question anymore. I mean, it'd be highly unlikely that they go in March, cut in March, unless you see some, you know, true collapse in next week's inflation report or some sort of negative payroll the next couple of months. So a lot of this bearishness, if you will, is priced in simply because they've taken out so many cuts. Well, so the market now only sees one cut here this year, do you? We see two, actually. We're still staying with the two. We have June and September, right? But listen, there's a lot of data from now to then. And one thing that we are, have been, that we know and the Fed has stated clearly, they're data dependent, right? So you're going to see a lot of shifting narrative for each number, which is, you know, which really just makes the industry market that much more volatile and will probably continue to be volatile given there's such data dependence. So we have a rhetoric right now, the economy is very strong. You know, they're not going to cut. Six months from now, that narrative can completely change. So as of now, we're staying with the June and September, 25 each, so 50 basis points in 2025. But again, it's, you know, it's really going to depend on what the data shows. Talk to me about what you're anticipating as we look ahead to the next four years under the Trump administration. We know that Trump's treasury has talked about shifting away from shorter term borrowing. How do you anticipate that impacting yield curve? You know, I think that's a great point because when you look at, you know, supply, supply is really more of a 2026 issue, right? I mean, it's not so much a 2025 issue, but to your point, what the market will be paying attention to in 2025 is the composition of that supply, meaning that, you know, whether or not they choose to take those bills that have been used to fund the deficit and lock them up, right? So you extend out five, you extend out to 10 years, and that composition change could have an impact on treasury yields. But I think that's one of the reasons why that we have this rising term premium, why the yield curve is steepening, because investors are looking for compensation for that potential. But, you know, we really don't know, or we don't see a lot of supply or is increase in supply a concern until that 2026 sort of timeframe. But even listen, a lot is gonna get to be seen in terms of what they could actually get passed through, particularly when it comes to further tax cuts outside of just the extension. But that's gonna be, I think, an end of the year type of issue into 26. What's not is how that composition works and whether or not they take those bills that are rolling off and lock them in a little longer. But I think that you're getting compensated for that now, and that's why the term premium's been rising so much. All right, Leslie, thanks so much for joining us. Thank you.