We think that the Fed will cut rates at the end of the week, regardless of the US election outcome. At current levels (5%), the Fed funds rate is still clearly in restrictive territory. Notably as headline CPI cools to 2.4% YoY (core PCE is running at 2.7% YoY), the real FFR rate has risen to 2.6%, very high by any standards. With inflation at these levels, there is ample leeway for the Fed to deliver a few more cuts. That said, the pace of rate cuts is likely to slow from the 50bps in September to 25bps in November given still firm US data and benign financial conditions (thus far). If data continues to stay firm, a further pace reduction to once per quarter may be on the cards. Short-term USD rates are already pricing in this less dovish stance. Current pricing is for the Fed to get to 3.75% by end-2025. At the most hawkish point in this cycle, the market was looking at a terminal rate of around 4%. Accordingly, we are not convinced that there are a lot more upside to 2Y yields from here. Longer-term USD rates are likely to be volatile in the coming few days. Considerable term and inflation premium have been built up over the past few weeks in anticipation of a Trump sweep. Benign sentiment has also buoyed yields. A scenario other than a Trump victory with a Republican sweep may well herald a relief rally in USTs.
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