Historically, Fed cutting cycles tend to trigger large Treasury rallies, Bank of America said.
It would mean that the 10-year rate could fall as low as 2.25% by May 2024, down from about 4.12% now.
"Because of the Fed's current high policy rate compared to the post-2008 levels, Fed cuts could last longer and go deeper than historical cycles."
The Treasury market's comeback might still be in its early inning, as bonds tend to keep rallying even after Federal Reserve rate cuts have begun, Bank of America said in a Thursday note.
Bond market investors have already sent yields tumbling over the past month, to get ahead of the start of rate cuts. After hitting 5% in late October, the 10-year yield is now about 4.12%.
"The Treasury market has rallied substantially after the last hike in each of the 5 hiking cycles back to the 1988 cycle," the note said.
Historically, between the last hike and first cut, the 10-year Treasury yield has declined in a range of 72 to 163 basis points, averaging a 107 basis point drop, according to analysts.
By that measure, the rate could land between 2.25% and 3.15% by the time the Fed starts cutting in May 2024, they said. If rates hit the bottom end of that range, it would mark the lowest since early 2022, when the Fed's tightening cycle was just beginning.
And Treasurys are also known to rally during the cutting cycle itself, with yields usually continuing to slide in the first six months. In addition, the upcoming easing cycle could go further than usual.
"Because of the Fed's current high policy rate compared to the post-2008 levels, Fed cuts could last longer and go deeper than historical cycles," BofA said. "In general, the Fed has delivered more cuts than hikes, with an average of 290bp of hikes followed by an average of 375bp of cuts."
Still, the report shouldn't be confused with Bank of America's actual outlook on 2024 yields, as its house forecast is for a 10-year rate of 4.25% next year, warning that any lingering inflation pressures could limit the bond rally compared to historical examples.
Stickier-than-expected inflation could generally upset hopes for a Fed pivot, as central bank officials have warned that there still may be reason to keep policy restrictive. Nonetheless, cooling labor-market and inflation data has convinced markets that the hiking cycle is over.
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