The iShares 20+ Year Treasury Bond ETF ( TLT ) surged 0.8% on Monday, climbing above $101 per share to its highest level since July 2023 as investors anticipate an imminent interest rate cut by the Federal Reserve.

On the same day, Yields on the 30-year U.S. Treasury bond dropped to 3.93%, marking their lowest levels since late July 2023, indicating higher demand for bonds.

The Federal Open Market Committee (FOMC) is set to meet on Sept. 18, and while a rate cut is a sure thing, the size of it remains uncertain.

Probabilities derived from fed futures — as tracked by the CME FedWatch tool — indicate a 61% chance of a 50-basis-point rate cut, bringing the federal funds rate down to a range of 4.75-5%. Yet, there is also a 39% chance of a smaller, 25-basis-point cut.

Chart: TLT ETF Hits July 2023 Highs Amid Rising Speculation Of A 0.5% Rate Cut

Image: Benzinga Pro

Analysts And Media Remain Divided

Top financial media outlets have increasingly leaned toward the likelihood of a 50-basis-point cut. They argue that current interest rates are overly restrictive given the state of inflation and the labor market.

However, Wall Street analysts and big banks (i.e., Goldman Sachs and Bank of America) are cautious. They forecast a more modest 25-basis-point cut.

Bank of America did, however, note that a “weak retail sales report” on Tuesday could tip the scales toward more aggressive easing. “A very weak retail sales report” would likely signal weakening consumer spending, potentially prompting the Fed to initiate a larger rate cut to support economic activity.

Goldman Sachs economist David Mericle commented that a larger cut would be “somewhat out of keeping with usual Fed practice.” He highlighted that such significant cuts are typically reserved for clear economic crises or notable spikes in unemployment.

Veteran Wall Street investor Ed Yardeni also weighed in on the debate.

“Fifty is the usual amount kicking off an easing cycle, but the economic circumstances are different this time,” he said. “There's no recession clearly barreling toward us.”

According to Yardeni, if the Fed opts for a larger cut, stock prices could continue to soar, potentially inflating a bubble reminiscent of the dot-com era.

“25bps would be enough for now pending the next batch of data releases—which we expect once again will confirm the economy's resilience,” he added.

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