There will be Fed rate cuts despite inflation concerns – Ironsides’ Barry Knapp

[Department of Treasury]
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The back end of the U.S. Treasury market remains under pressure, but opportunities exist in mid-term bonds (US5Y [https://seekingalpha.com/symbol/US5Y]), (US10Y [https://seekingalpha.com/symbol/US10Y]) amid expectations of Federal Reserve rate cuts later this year, said Barry Knapp, Ironsides Macroeconomics director of research.

In a CNBC interview, Knapp said he maintains his recommendation to be “underweighted the back end of the Treasury market,” noting his personal allocation remains 70% stocks and 20% bonds.

Knapp dismissed concerns that recent inflation data will prevent the Federal Reserve from cutting interest rates. He contrasted current conditions with 2021, pointing out that government spending has slowed significantly from a 45% increase in early 2021 to just 5% currently, while money supply growth has decreased from 27% to 4%.

U.S. Treasuries are higher on Tuesday, with the U.S. 10-year Treasury (US10Y [https://seekingalpha.com/symbol/US10Y]) up 5 basis points to 4.49%; the 5-year Treasury (US5Y [https://seekingalpha.com/symbol/US5Y]) up 6 basis points to 4.06%; the 2-year (US2Y [https://seekingalpha.com/symbol/US2Y]) up 5 basis points to 3.97%; and the U.S. 30-year Treasury bond (US30Y [https://seekingalpha.com/symbol/US30Y]) up 3 basis points to 5.01%.

Knapp also said he expects upcoming economic data to reveal weakness that will prompt Fed action. “I think we’re going to see very soft growth numbers over the next month that are going to convince the Fed that [Christopher] Waller’s right,” he said, and suggested that the Fed “will find themselves behind the curve in September” regarding rate cuts.

Federal Reserve Governor Christopher Waller recently said he believes the Fed could cut interest rates later this month, and that it should shrink the size of the balance sheet, and bank reserves.

And despite Knapp’s cautious stance on long-term Treasuries (US20Y [https://seekingalpha.com/symbol/US20Y]), (US30Y [https://seekingalpha.com/symbol/US30Y]), (SPLB [https://seekingalpha.com/symbol/SPLB]), Knapp identified potential opportunities in shorter-duration bonds (BSV [https://seekingalpha.com/symbol/BSV]).

“The 2-year-to-5-year part of the curve probably represents a really good opportunity,” he stated, citing various pressures on longer-term bonds, including changes in Japan’s monetary policy and increased spending from Germany.

Knapp also predicted several upcoming weak economic indicators, including “a really weak core GDP number,” “another fourth consecutive big negative revision” to benchmark payroll estimates, and “another week employment report where the internals are really soft.”

These factors, he said, will force the Fed to “play catch up” with rate cuts, potentially benefiting investors positioned in 5-year Treasury bonds (US5Y [https://seekingalpha.com/symbol/US5Y]).

Investors can track more bond ETFs, here [https://seekingalpha.com/etfs-and-funds/etf-tables/bonds].

MORE ON UNITED STATES 5-YEAR BOND YIELD:

* How And Why I Built A Self-Funded Pension Using US Treasuries [https://seekingalpha.com/article/4798643-how-and-why-i-built-a-self-funded-pension-using-us-treasuries]
* Spread between US5Y and US30Y hits 101 bps, steepest curve since 2021 [https://seekingalpha.com/news/4462922-spread-between-us5y-and-us30y-hits-101-bps-steepest-curve-since-2021]
* Treasury yields mixed after Fed still sees policy easing this year, but in no rush to cut [https://seekingalpha.com/news/4459629-treasury-yields-mixed-after-fed-still-sees-policy-easing-this-year-but-in-no-rush-to-cut]