As the Federal Reserve gears up to cut interest rates for the first time in four years, this market is pricing in the most aggressive rate-cutting cycle since the 2008 Financial Crisis. Meanwhile, the bond market (^TYX, ^TNX, ^FVX) is seeing a rally in the front end of the yield curve, which has historically been witnessed before economic downturns.

WisdomTree head of fixed income strategy Kevin Flanagan joins Catalysts to discuss what the bond market is signaling about the health of the economy

"When you look at pricing, say just in the Treasury market, I would argue that right now, based upon the economic numbers, sure, the jobs numbers have cooled off a little bit, but there's nothing screaming within the data that would suggest we need to go into a recession prevention mode. And that's what it seems like the bond market is trying to tell the Fed, that hey, if you don't go big, you're behind the curve already. You're going to continue to be behind the curve, and that we're going to have problems in 2025," Flanagan tells Yahoo Finance.

He notes that the Fed's dot plot will be equally as important as the size of the Fed's first rate cut as it will give investors a better idea of the rate cut path ahead. He explains that a 25-basis-point cut will be viewed by the bond market as a "disappointment." He adds, "So it's almost as if the bar has been raised very high for the Fed to maintain this rally."

Meanwhile, as the Fed kicks off its rate easing cycle, Flanagan explains that the macroeconomic backdrop will continue to "provide support for risk assets." On the bond side of the market, he currently sees the best potential value in the three-month Treasury bill and the ten-year note (^TNX).

"I would continue to take advantage of that with Treasury floating rate notes and pair that with sort of like a core duration on the other side. That way, you have flexibility. You're not really putting your chip down on red or black as to what you think rates are going to do going forward, meaning in the Treasury market, not what the Fed is going to do. So I think the barbell strategy is a very good benchmark approach for fixed income."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl