Fed Cuts Won't Save You (Bond Vigilantes Are Back)

Don Kaufman here.

Everyone's betting on rate cuts saving the day. Fed cuts mean cheaper borrowing, right?

I'm looking at the actual futures right now – the ZQ Fed funds where people bet real money – and they're telling a completely different story.

December Fed funds futures are pricing 3.7325%. Current rate's 3.8775%.

That's only 0.14% cut priced in. Not even a full quarter point.

These aren't wishful thinkers. These are traders betting hundreds of thousands saying it's basically pot odds whether cuts even happen.

And when you look out further? January, February, all the way to April. None of them have a full cut locked in at 100%.

The professionals moving billions aren't buying what everyone else is selling.

Why Cuts Won't Help You Anyway

But even if Powell does cut, it won't matter for what you actually pay.

The Fed controls overnight rates. They don't control the ten-year Treasury that determines your mortgage rate.

And that's where things get interesting.

I'm watching seven to ten year bonds sell off every morning. Bond prices falling means yields rising.

Your borrowing costs are climbing while everyone celebrates cuts that haven't happened yet.

We're already back up another quarter point from the lows on rates that actually matter to real people.

Powell's Hawkish Surprise Coming

I think Powell drops 25 basis points like everyone expects. But comes out more hawkish than the market wants.

The Fed's gonna try to assert some independence here.

Show they won't just roll over for whatever the administration wants.

I don't think this vote's gonna be unanimous either. Some of these Fed governors are getting uncomfortable with where we're headed.

The Bond Market Rebellion

I thought Fed bond buying would push prices higher and drive yields down.

That's not happening.

The bond vigilantes are waking up. The guys who actually decide if the government can keep borrowing like there's no tomorrow.

We're already monetizing Treasury debt. The balance sheet's expanding again.

At some point, somebody's gotta say enough.

The Fed can cut overnight rates, but if bond buyers refuse to finance long-term government spending at current yields, those cuts become meaningless.

Who Wins, Who Gets Screwed

This creates winners and losers.

Banks love this steepening curve. They can borrow overnight for nothing and lend long-term at higher rates.

It's basically free money for them.

Which explains why financials keep rallying even when everything else looks shaky.

But for regular people? For businesses trying to expand? You're getting screwed.

The Fed cuts the rate that doesn't affect you while the rates you actually pay keep climbing.

The repo market's already showing problems. Why?

Because all these banks would rather get paid 2.5% for doing nothing than lend to actual people at 2%.

When they can park money risk-free with the Fed overnight, why take credit risk on some random borrower?

Your mortgage rate isn't tied to Fed funds. It's tied to those ten-year bonds that keep getting hammered.

Forget about refinancing. Forget about cheaper business loans.

The Fed can manipulate short rates all they want, but if the bond market doesn't cooperate on the long end, you're getting exactly nothing.

Everyone's pricing in Fed salvation.

The bond market's pricing in fiscal reality.

And reality's winning. Interest rates on the stuff that matters to you? They're going higher, cuts or no cuts.

To your success,

Don Kaufman