Investing.com -- Bond vigilantes are piling on bearish bets on bonds, eyeing another leg up in the 10-year Treasury yield toward 5% amid doubt that the Federal Reserve has as much room as it believes to continue cutting rates.
The Fed has previously signaled that rate cuts could continue as the neutral rate is "much lower than the prevailing 4.33%," Yardeni Research said in a recent note, but "bond vigilantes aren't buying the Fed's esoteric narrative."
"Long-term yields may continue rising until the Fed acknowledges the economy’s strength and officially hits the FFR pause button," Yardeni added.
The skepticism surrounding the Fed's ability to deliver on rate cuts stems from concerns about sticky inflation and a resilient labor market.
The Fed, however, is taking note.The minutes of the Federal Reserve’s Dec. 17-18 meeting released Wednesday showed that the central bank could be laying out the carpet for a pause.
After the December meeting, the "Committee would likely slow the pace of further adjustments to the stance of monetary policy," the minutes showed. The more cautious sentiment among Fed members on further rate cuts was prompted by slower progress on curbing the pace of inflation toward the 2% target.
"Participants commented that the overall pace of disinflation had slowed over 2024 and that some recent monthly price readings had been higher than anticipated," the minutes added. Several Fed members "observed that the disinflationary process may have stalled temporarily or noted the risk that it could," it added.
The bond market appears to be bracing for fewer cuts as the 10-year Treasury yield climbed above 4.5% on Tuesday to its higher level since April last year.