Do The Bond Market Experts Ever Get Tired of Being Wrong?

John Robinson |

By John H. Robinson, Financial Planner, March 28, 2024

From December 2023 through February of this year, the financial news pages were filled with articles like this one - “How to best position for rate cuts” (CNBC, Feb 1, 2024) - in which bond market “experts” were urging investors to jump into intermediate to long term bond funds/ETFs in anticipation of three to seven Federal Reserve rate cuts in 2024.  In my March 4, 2024 post, I provided other similarly misguided predictions including Alliance Bernstein’s bold prediction that the bond market would come “roaring back” in 2024.

So here we are at the beginning of June and there is nary a fed rate cut in sight.  What happened to the seven rate cuts so many bond market gurus forecasted in December and January?

For his part, Fed Chairman Powell continues to be clear in conveying that the Fed’s primary objective is to keep rates high until the inflation has been tamed and is on track for its 2% target rate.  He has consistently and unambiguously stated that inflation is not yet under control and that further rate hikes remain a possibility.  As I said in my March 4th commentary, Mr. Powell has no reason to lie, and he has been true in signaling the Fed’s position and future intentions since the outset of rate increases in early 2022.


So, you are telling me there’s a chance?

As I stated in my March post, I find it baffling that so many people whom the financial media have anointed as bond market experts continue to listen to the Fed’s public statements and interpret them to mean that a series of sharp rate cuts are coming soon. 

Such persistent wishful thinking reminds me of an iconic scene in the comedy cult classic “Dumb and Dumber” in which an attractive FBI agent responds to Jim Carrey’s character’s request for a date by telling him that the odds of her going out on a date with him are “one in a million.” To which Carry gleefully replies, “So you’re telling me there’s a chance!”


Bond Yields Have Been on the Rise – Lock in CD Rates Out As Far as 3 Years

As of this writing interest rates have risen from the beginning of the year.  Although yields are not quite as high as they were in May or November of 2024 when investors could get 5% on CDs out as far as 5 years, CD yields are now around 5.0% as far out as 2.5-3 years.  The 5% marker has so far served us well in guiding how far investors should extend the maturity of their CD ladders.  If rates continue to creep up, I will continue to advise extending the ladder with new money or with maturing bonds/CDs.

While just about everyone believes that the bond yield curve will and should return to its normal shape in which long-term bonds pay more than short-term ones, I continue to believe the shift to a normal curve will happen more from longer-term rates rising in recognition of persistent inflation than from short term rates falling as a result of rate cuts.


The Consequences of Wishful Thinking

As for the advice in the February 1, 2024 CNBC piece about how to position investor portfolios for rate cuts, the 20-year treasury ETF that was recommended (TLT) is down 7.98% for the year-to-date while the intermediate bond fund (VCIT) is down 2.12% YTD (through 5/24/2024).  Here are some of the headlines since then:

It’s a higher-for- Longer World for Rates, and That’s OK. (WSJ, 3/14/2024)

Inflation Data sinks stocks on Doubts Fed will Deliver 3 Rate Cuts (MarketWatch 3/14/2024)

Jamie Dimon Warns U.S. Might Face Interest-Rate Spike (WSJ, 4/8/2024)

Doubts Creep In About a Fed Rate Cut This Year  (WSJ,4/8/2024)

The Dream of Fed Rate Cuts Is Slipping Away (WSJ, 4/24/2024)

Think Inflation is Cooling, Think Again (Barron’s 5/17/2024)


Final Thoughts on the Outlook for Rate Cuts

While calling out the so-called bond market gurus has been a persistent theme in my bond market commentary over the past two years, I concede that the Fed may eventually (perhaps not in 2024) be inspired to cut rates in the face of tamed inflation.  However, I maintain that it is unlikely the Fed will cut rates to anything close to the generational lows of 2021.  Realistically 4%-6% short-term yields are in line with historical norms and are probably where rates should settle out once the Fed accomplishes its inflation-quashing mission.  

Longer-term rates on bonds and mortgages should probably settle in the 6-8% range.  30-year mortgages at 2.75% and the 30-year treasury at 1.4% will likely prove to be a generational anomaly.  As a practical matter investors and lenders need to earn a higher rate in return for tying up their money for long periods of time. This view is not so much a prediction as it is common sense.

It is amazing how far common sense and listening to the Fed’s messaging can take you in understanding the bond market.  Conversely, it is surprising how many financial media darlings appear to lack common sense and ignore the Fed.


John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru.