Disinflation Spurs Treasury Dip, 5 ETFs Eye Gains on Fed Cuts

Treasury yields dip on disinflation hopes, sparking rally in 5 bond ETFs amid anticipated Fed rate cuts.

By Max Weldon

5/16, 14:23 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
SPDR Bloomberg High Yield Bond ETF
iShares iBoxx $ Investment Grade Corporate Bond ETF

Key Takeaway

  • Disinflation hopes and benign April CPI data are driving Treasury yields below the 200-day average, signaling a major market trend shift.
  • Fed Chair Powell hints at future rate cuts, with markets pricing in a 50 basis point reduction by year-end.
  • Bond ETFs like TLT, BND, LQD, JNK, and EMB poised to rally on expectations of Federal Reserve rate cuts.

Treasury Yields Test Key Levels

Following the release of benign economic data, key Treasury yields are now testing the support of the crucial 200-day moving average, indicating a major trend shift in the bond market. This movement is largely driven by investor anticipation of Federal Reserve rate cuts, fueled by the latest inflation data. April's inflation rate, as measured by the consumer price index (CPI), came in at 3.4%, aligning with forecasts and showing a slight decrease from the previous month. This has led to increased hopes for a disinflation trend, further supported by Federal Reserve Chair Jerome Powell's comments suggesting the next rate adjustment would likely be a cut, albeit later than markets expect.

Fed Rate Cut Expectations

The money markets are currently pricing in a 50 basis point reduction in interest rates by the end of the year, with a significant chance of the Federal Reserve beginning its easing cycle as early as September. This sentiment has pushed the yield on the benchmark 10-year Treasury note to around 3.36%, with an intraday low dipping below the 200-day average. The 200-day moving average is a critical technical indicator, and yields falling below this level often signal a bearish trend, indicating a move towards safer assets amid slowing economic growth or expectations of lower interest rates.

Bond ETFs Rally

The shift in Treasury yields has sparked a rally in bond ETFs, particularly those focusing on long-duration bonds. ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) and the Vanguard Total Bond Market Index Fund ETF (BND) have seen gains following the inflation data release. This trend is also evident in the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), SPDR Bloomberg High Yield Bond ETF (JNK), and iShares J.P. Morgan USD Emerging Market Bond ETF (EMB), all benefiting from the rising expectations of Fed rate cuts.

Management Quotes

  • Jerome Powell, Federal Reserve Chair:

    "The next adjustment would likely be a reduction."