(Bloomberg) - Traders’ conviction on three quarter-point interest-rate cuts from the Federal Reserve this year is quickly dissipating, with markets now favoring just two reductions.
Interest-rate swaps imply around 60 basis points of US monetary easing this year, which means two cuts is the most likely outcome with the first expected by September, according to Bloomberg pricing. On Friday, the chance of a third cut was still above 50%.
Treasuries fell on Monday along with peers, sending yields across the curve to the highest levels of the year. The two-year rate rose three basis points to 4.78%, while the 10-year one are was within striking distance of the key 4.5% level that some investors are watching as a major threshold that could determine whether rates revisit last year’s highs.
Markets have been tempering bets on Fed cuts for days as US economic data remains resilient and Fed officials have pushed back against the need for easing, with some even stressing a risk of hikes should progress on inflation stall. Consumer price data is due later this week.
“The focus on the timing of a possible rate cut is being further undermined by the data, and the Fed appears to be looking for the appropriate response if inflation dynamics do not weaken further or even accelerate again,” said Rainer Guntermann, a strategist at Commerzbank. “Following Friday’s surprisingly strong payrolls report and the hawkish Fed comments over the weekend, Wednesday’s US inflation data will be crucial.”
At the start of the year, expectations were widespread that the Fed’s 11 rate increases in the past two years would not only curb inflation but also cause economic stress, leading the market to bet on as many as six cuts this year. Instead, progress toward lower inflation has slowed, growth metrics have remained robust, and investors continue to shovel money into stocks and corporate bonds at a pace that suggests the economy doesn’t yet require lower rates.
That’s seen Treasuries selloff, upending the carefully calibrated portfolios of investors who bet that bonds would go on a tear. A Bloomberg gauge of US Treasuries has lost 2% this year.
Still, some asset managers are holding the line and wagering that Fed cuts, when the come, will fuel a long-awaited rally.
By Greg Ritchie
With assistance from Liz Capo McCormick
