I wrote in early January that Treasury yields would rise because economic data had turned upwards from the universally bad data released in November. As hot economic data continued in January and February, Treasury yields have risen about half of what they fell from last October (see chart below.)

Journalists and commentators are taking this better economic data, higher yields, and higher stocks to mean much more than the bond market or Fed is. Commentators are suggesting the Fed won’t cut rates this year and that the economy skipped a recession or soft-landing.

I don’t see it that way. This seems like a typical backup within the Treasury bull market that started last October (assuming that October was the cyclical peak, see #7 below.) The “great economy” narrative will last only as long as the recent streak of good economic data lasts. When economic data turns lower (as it will inevitably do), so will Treasury yields.

Consider these points:

  1. It has been just two months since the bond market thought the Fed was lowering rates six times in 2024. Things haven’t changed THAT much. The reasons supporting that are still in the background: broadly falling inflation, a slowly weakening labor market, and business cycle maturity.

  2. The bulk of the Commercial Real Estate crisis is still ahead and exacerbated by higher interest rates.

  3. China is weakening and exporting deflation to the world.

  4. Stocks were strong in September 2000 and October 2007 too; within months of the Fed embarking on major lowering campaigns. New highs don’t mean “all is well.”

  5. Reliable markers of the business cycle indicate being near a business cycle peak: the yield curve de-inversion (10-year minus 2-year) since last July, a steep Fed hiking cycle followed by a Fed pause, and the Leading Economic Index’s 13.4% drop from its peak.

  6. The Fed is ready to ease. They’ve clearly communicated that they are primed to ease rates when the economic data warrants it, not when the calendar hits a certain month.

  7. Yields most likely peaked for the business cycle in October 2023 as that was three months past the last Fed raise. Historically, the 2-year makes a cyclical yield peak within +/-3 months of the last Fed raise and usually after a dramatic sell-off like we had. If yields have peaked for the cycle, we are in a Treasury bull market despite the recent rise in yields.

In the moment, every business cycle looks substantially different from the ones that came before it, but when you zoom out and really look at it, this business cycle is developing in the usual order and with the typical signs, it is just taking longer than expected. I continue to expect a recession this year and for the Fed to cut rates deeply just like it has done in cycles before. Because the Fed’s interest rate lever is “free” to use, they will be willing to go back to 0% much faster than the Treasury will be to use fiscal stimulus. The talk of a higher neutral rate and a shallow cutting cycle is easy when the economy is good. Upon a recession, the focus will shift to finding enough stimulus to help the economy. In the meantime, this yield backup may continue a little more, but the Treasury bull market is in-tact.