Rate cut expectations cool! U.S. bond rates hit 4.5%, traders stepping in to "buy the dip".

On Friday, strong retail sales data cooled expectations for a rate cut by the Federal Reserve next month, as U.S. bond yields reached their highest levels in several months. However, it turns out that high U.S. bond yields are attractive to bond investors. In particular, the benchmark 10-year U.S. Treasury yield broke through 4.5% for the first time since May. Shortly after, a large trade in 10-year Treasury futures indicated that at least one trade found it cheap enough - this large futures trade included 16,000 December 10-year Treasury contract. Within a few hours, the yield fell back to around 4.43%, increasing the value of the trade by approximately $5 million. With the fall in oil prices and benchmark stock indices in the U.S., there was an increased demand for bonds, leading the yields to continue dropping from their daily highs. U.S. stock indices continued to rise this week, with the S&P 500 trading near record highs, and Federal Reserve Chairman Powell stating that there is apparently no rush to cut rates. Bloomberg's index measuring returns in the U.S. bond market fell this week, with the index only up 0.6% year-to-date. Mike O'Rourke, Chief Market Strategist at Jonestrading, said: "The 4.5% yield on the 10-year U.S. Treasury is very attractive. When the stock market falls, the demand for U.S. Treasuries as a safe haven is very good." Earlier declines in the U.S. bond market indicated a decrease in confidence about a rate cut next month, as retail sales data was seen as supporting Powell's cautious stance. In the swap market, traders on Friday estimated a 50% likelihood of a 25 basis point rate cut at the December Fed meeting, down from about 80% earlier in the week. As the bond market stabilized, the probability of a rate cut in December rose to around 60%. Bob Sinche, Senior Global Macro & Markets strategist who has long been involved in market research, said: "Almost no one supports the Fed's loose policy. Chairman Powell's uncertainty about the necessity of a rate cut in December is not convincingly supported by today's data." Other Fed officials that spoke on Friday avoided sending clear signals about December. Boston Fed President Collins said the central bank's decision will be guided by upcoming data and a rate cut could still be possible. Chicago Fed President Guzby said as long as inflation continues to decrease towards the Fed's 2% target, rates could drop significantly in the next 12 to 18 months. Since President Trump won the U.S. presidential election on November 5, traders and economists have been reassessing their expectations for a rate cut in 2025. Some on Wall Street believe his policy pledges (including raising tariffs) could stimulate inflation, potentially altering the Fed's course. Swap contracts suggest that by December next year, the Fed will have cut rates by around 74 basis points, and several Wall Street economists have already lowered their expectations for cuts in 2025. For example, after Powell's speech on Thursday, JPMorgan hinted that policymakers may start to slow down their easing pace as early as January next year. According to Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, there is still a possibility of a 25 basis point rate cut next month, but the path afterwards is uncertain. He said: "I think they will do nothing in January. The Fed may slow down after that and could start cutting rates quarterly."