After the first cut of 50bpt in September to 4.88%, the market currently expects the Fed to:

  • Lower the Federal Funds rate to 4.27% by Dec 2024, slightly less than 4.26% last week,
  • and further cut to 2.88% by Dec 2025, slightly less than 2.84% last week, for total of around 2.50% in cuts.

Outlook:

Historically, soft-landings have been very difficult to achieve, thus, the hard-landing scenario is baseline scenario. The labor market is likely to continue to weaken. Pandemic excess-savings are exhausted, and the defaults are rising. The housing market is a bubble, which is likely to burst with the labor market weakness, and cause the systematic credit event. Other sources of systematic credit events include CRE, regional banks, and government debt, as the deficit continues to rise.

Thus, the 2Y yield is likely to fall towards the 2% level (currently at 3.57%), and the primary position in 2Y futures should be LONG.