Economic data is changing and yields will soon follow
As everyone is thinking about what Trump’s administration means for inflation, the real story for interest rates is the economic data.
Economic data rose immensely from August through mid-November bringing interest rates and a hawkish Fed narrative with it. The Lantern Daily Economic Index (LDEI) rose 53 points in this period with three categories dominating the rise; the service sector (34%), inflation (26%), and consumer spending/confidence (23%).
Now, the index has fallen 11 points since the November 12th high and the fall is concentrated in those same three areas (see asterisks in table below).

It shows that the trend of economic data is rolling over with some order. In my research and thinking, Treasury yields are primarily affected by six factors: economic data, narratives and policy-bias of the Fed, the multiple of economic data (how far it is extrapolated, think October 2023’s “higher for longer” Fed campaign), event risk (i.e., COVID-19 or SVB failure), “risk-on” performance, and foreign economics. The last three aren’t a focus right now.
Economic data has stopped rising, but extrapolation is in high-gear since the Fed’s 12/18/2024 SEP projections and because economic data has been mostly strong for five months. The longer a trend goes, the longer it is extrapolated. See recent examples here, here, and here. I see the “extrapolation-phase” as the trailing part of a narrative. Once softer economic data broadens out to more categories (particularly labor) and the Fed’s forecasts get fully saturated into the market narrative, interest rates are going to head back down to make new cycle lows in the ongoing U.S. Treasury bull market.
The bond market is only priced for the Fed to cut 45 basis points more in this cycle (to 3.93%, SOFR). The Fed projected they would cut back to 3.1% by 2027 in their latest projections. Even without a recession, the 2-year is cheap. If a recession starts in Q2 of 2025, as I expect it to, the 2-year is very cheap.