Zhitong Finance has learned that bond traders are betting that the Fed will cut interest rates by no more than 75 basis points this year, which is in line with the most likely outcome hinted at by Fed policymakers. The swap contract was repriced to a higher interest rate level, with the December contract rate reaching 458%, only more than 5The effective federal** rate of 33% is 75 basis points lower. The Fed's target rate range has been at 5 since July last year25%-5.5%.
The market's implied expectations for the Fed's next move have been converging with the median of the latest quarter** made by policymakers in December. However, even the magnitude of such a rate cut is in question, and some investors are considering the possibility of further rate hikes. Tony Farren, managing director of interest rate sales and trading at financial group Mischler Financial Group, said: "The bubble with high expectations of rate cuts has been blown away. The pricing in the current market is reasonable. β
U.S. Treasury yields edged higher in afternoon trading after Tuesday's repricing, despite a good 7-year auction result. Bond investors are also facing the onslaught of a large number of new corporate bond issuances, which provides ample options for yield-seeking investors. Investment-grade companies issued more bonds in the U.S. this month than in any other February on record. However, the pace of corporate bond issuance slowed from Monday, Monday was the third busiest day of the year, and consumer confidence was weaker than expected in February.
Expectations of interest rate cuts are too optimistic
At the beginning of the year, traders expected the Fed to cut interest rates by more than 150 basis points in 2024. For some, this expectation is based on the idea that the Fed's 11 rate hikes over the past two years have led to at least one mild recession in the U.S. economy this year. Since then, however, U.S. economic growth data has generally exceeded expectations, while the downward trend in inflation has shown signs of stalling. Leah Traub, portfolio manager at Lord Abbott, said: "In conclusion, my view is 'Finally! βγThe market is overly optimistic about the timing and magnitude of the Fed's rate cuts this year. β
Fed policymakers have said that while they expect to cut rates this year, they first need to see more evidence that inflation is continuing to pick up toward its 2% target. The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is scheduled for release on Thursday and will provide further insight into price pressures. Previously, the Consumer ** Index (CPI) for January showed higher-than-expected inflation.
Farren said the inflation data was in line with expectations and could be positive for the market as the long-term trend for consumers** is favorable. He said not holding coupon auctions until March 11 could also help the market. U.S. Treasuries were supported last week in anticipation of a reallocation of stimulus funds to the bond market at the end of the month, following a strong performance.
Fed Chair Jerome Powell will testify before the US Congress on March 7 and the next day will release February employment data, the next two major events after this week's personal consumption expenditures data that could affect expectations for a rate cut this year. George Catrambone, head of fixed income at DWS Investment Management Americas, said:"Forward rate expectations in the market seem to have gone too far over the past year, so it wouldn't surprise me that hawks have taken over the market until the data cools further. "