Fed at peak, but QT and heavy UST supply to limit yield decrease

In Short

With the policy rate now likely at its peak the market focus will concentrate on the timing and speed of a Fed pivot in 2024. In our baseline scenario, sticky inflation and a resilient labour market will require the Fed to stick to its current rate of 5.50% (upper bound), with only 75bps cuts from mid of next year in our books.


  • The Fed has likely reached peak rate following 525bp of rate hikes that have been complemented by tighter financial conditions recently. A first rate cut is unlikely before the end of H1 2024, with risks tilted to a later pivot. We provide estimates of the likely path under different scenarios.
  • Speculation about a higher neutral rate added to pressure on bond yields. Our new measure of R-star based on a large set of variables and an alternative methodology, partially backs this claim. But the rise will be modest, and we caution against excessive reliance on uncertain R-star measures to gauge the policy stance.
  • Quantitative tightening (QT) may outlive a first rate cut, possibly enduring into 2025. The pace of QT could be slowed down, though, in case tensions at the long end of the threaten financial stability. Outright asset purchases are likely to restart later as the Fed plans to keep excess reserves aligned with nominal GDP.
  • High US Treasury supply and the Fed’s QT can push the term premium up a bit more. That said, the looming economic weakness and the expectation of falling key rates in 2024 are likely to trigger lower US yields.

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Fed at peak, but QT and heavy UST supply to limit yield decrease

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