I suppose this goes without saying, but US rates are more pessimistic about the macro outlook than the Fed.

Or perhaps it’s more accurate to say the market is free to express a view on the outlook in a way policymakers aren’t.

If you’re a Fed official, there are two reasons why putting on a brave face for the public is imperative in 2023. The first reason is just the tired, old “nothing to see here” joke — you want to foster a sense of calm when something’s amiss, and in this case what’s amiss are bank failures.

The second reason relates to inflation realities. Inflation is far too high, and if the economy is on the verge of falling off a cliff, that’d suggest limited scope for the additional rate hikes needed to restore price stability. If you’re the Fed, you want to at least pretend the economy can handle enough in the way of tightening to rein in inflation, because if it can’t, then you have an existential problem on your hands.

The market, by contrast, can “say” whatever it wants to say. And currently, it’s saying that cuts there will be, and in relatively short order.

A run of scorching-hot data briefly succeeded in doing what Fed rhetoric couldn’t — squeezing rate cut odds out of the market. Jerome Powell tried to deliver the coup de grâce to 2023 rate cut bets during remarks to the Senate on March 7. Then the banks started failing. Such is Powell’s luck. This is, after all, the same man whose very first day in the big seat was Vol-mageddon.

But even if markets are more “right” than the Fed when it comes to the outlook, that doesn’t necessarily mean that rate cuts are coming.

“The bigger question in our minds isn’t about additional hikes, but rather whether the cuts currently being priced — likely the result of high market-implied odds of fairly negative economic outcomes– is appropriate,” Goldman analysts led by Praveen Korapaty said.

The figure above gives you a sense of how bad markets think it could get. The odds of rates below 3.5% by year-end went from nil to nearly 40% after SVB failed.

In Goldman’s view, that’s probably overdone and yet, underscoring the ambiguous stalemate currently bedeviling macro watchers, Korapaty conceded that the bank “also does not see an immediate catalyst that would lead markets to reconsider current pricing of cuts.”

Meanwhile, funds/10s is on its way to -200bps.

Notwithstanding March’s still robust NFP report (which might’ve vindicated some reloaded bond shorts), last week’s macro figures for the US betrayed what I called a “uniform” deceleration. Between that and the potential for worsening geopolitical tensions to create sporadic demand for US duration, it’s not inconceivable that 10s could rally further.

Goldman seems to doubt it, though. “Although bond yields rose following the [jobs] report, they are still substantially below levels from the prior week,” Korapaty wrote, in the same note cited above. “We think this is partly the result of investors disproportionately overweighting bad news post-SVB [and] we suspect some weakness in the ISM data could be sentiment-driven,” he added. “If our assessment proves correct, yields have significant room to correct higher.”

Maybe, but as BMO’s Ian Lyngen and Ben Jeffery remarked, “An escalation of tensions between the US and China represents just the latest in the array of bond bullish factors supporting Treasurys and, as the list continues to mount, the potential for 2-handle 10s is very much top of mind.”

As for the inversion shown above, Lyngen reminded markets that -200bps “wouldn’t be history-making by any means.” “Nominal rates trading well below EFFR is a well-traveled path in the US rates market,” he wrote Monday. That said, he noted that “such extreme depths only tend to occur once the Fed has achieved terminal and rate cuts become inevitable.”