The First Cut is the Deepest: Bond Markets in the Next Stage of the Cycle

The U.S. economy is on the verge of the most widely anticipated Federal Reserve (Fed) rate-cut cycle in economic history. Everything from market to economic to political expectations appears wrapped around the decisions a handful of economic officials will make this week and for the coming 12 months. While historical patterns can offer some guidance, as we've seen in recent years, the bond markets have a way of defying expectations. Let's explore the potential scenarios for bond market performance in the six months following an initial Fed rate cut, keeping in mind the unique economic landscape we find ourselves in today.

Historically, the first Fed rate cut has been a signal that the central bank believes economic growth is slowing and inflationary pressures are easing. In a typical cycle, this has led to a rally in bond prices (and a decline in yields) across the curve. The rationale is straightforward: if the Fed is cutting rates, it's likely to continue doing so, which makes current yields more attractive and drives demand for bonds.

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