Treasury Yields Rise Following the Fed’s September Rate Cut

Monthly Client Update | November 1, 2024

Monthly Market Summary

The S&P 500 Index returned -0.9%, outperforming the Russell 2000 Index’s -1.4% return. Three of the eleven S&P 500 sectors traded higher, with Financials and Communication Services both gaining more than +1.5%. The remaining eight sectors all traded lower by more than -1% during the month.
Corporate investment-grade bonds produced a -3.2% total return as Treasury yields rose, underperforming corporate high-yield’s -1.0% total return.
International stocks traded lower. The MSCI EAFE developed market stock index returned -5.3%, while the MSCI Emerging Market Index returned -3.1%.

Stocks End 5-Month Winning Streak with First Loss Since April

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. The S&P 500 posted its first monthly loss since April, lowering its year-to-date return to +20.7%. Large-cap stocks slightly outperformed small-cap stocks, but most investment factors produced similar returns. In the bond market, Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome. With yields rising sharply, bonds traded lower for the first time in six months.

Treasury Yields Spike After the Fed’s September Rate Cut

The bond market has experienced several large swings this year. The 10-year Treasury yield began the year around 3.90%. However, as inflation rose early in the year, the 10-year yield climbed to 4.70% by late April. Yields then reversed over the summer as falling inflation and rising unemployment fueled expectations for deeper rate cuts. Between late April and mid-September, the 10-year yield dropped by over -1.00%. It hit a low of 3.62% the week of the Fed’s September meeting, when the central bank cut interest rates by -0.50%. It may seem counterintuitive, but since the Fed’s September meeting, Treasury yields have risen sharply. The 10-year Treasury yield ended October at 4.28%, rising by over +0.65% in one and a half months.

What’s behind this year’s bond market swings? Volatile economic trends and uncertain Fed policy. Two key data points have increased volatility: inflation surged early in the year before easing over the summer, while unemployment rose from 3.7% in January to 4.3% in July, then fell to 4.1% in September. The Fed aims for stable prices and full employment, but conflicting data has complicated its interest rate decisions. There’s general agreement that the Fed should continue to lower interest rates, but there’s debate about how quickly and how much. The recent increase in Treasury yields reflects expectations for fewer interest rate cuts. As we’ve seen this year, that outlook could change in the coming months.

Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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