The bond market seems to be increasingly skeptical that the Federal Reserve will cut interest rates twice more for the rest of the year...
On Friday, the bond market seems to be increasingly skeptical that the Federal Reserve will cut interest rates twice more for the remainder of the year.
Currently, traders estimate that there is about a 20% chance that the Federal Reserve will keep interest rates unchanged in November or December. Even after the strong U.S. employment data was released last Friday, the swap market still implies that the Federal Reserve will cut interest rates by more than 50 basis points by the end of the year, likely in two consecutive cuts.
U.S. Treasury bonds fell this week. The Bloomberg U.S. Bond Index is on track for a fourth consecutive week of declines, marking the worst performance since April. The yield on the 10-year U.S. Treasury bond has rebounded back above 4%, while the yield on the 30-year U.S. Treasury bond stands at 4.41%, the highest level since July 30.
This shift reflects a series of mixed reports on the U.S. economy, which have failed to provide a reason for the Federal Reserve to significantly ease monetary policy. Although the so-called "dot plot" projections of interest rate expectations by Federal Reserve officials suggest two more rate cuts this year, Atlanta Fed Chairman Bostic said this week that he would consider pausing rate cuts, while San Francisco Fed Chairman Daly indicated that there might be one or two more rate cuts this year.
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Kit Juckes of BNP Paribas wrote in a report:
"The market is less certain about the outcomes of the next few FOMC meetings, but the nearly 50 basis point rise in the 10-year U.S. Treasury yield since mid-September suggests that the market is increasingly convinced that the U.S. economy will not 'hard land', indicating a view that the likelihood of a 'no landing' is as great as that of a 'soft landing', which raises concerns that if fiscal tightening measures do not emerge, inflationary risks may re-emerge."
Consumer inflation data released on Thursday was higher than expected, exacerbating signs of rising wage pressures shown by last week's non-farm data. However, the PPI data released on Friday was generally more moderate.
Derivatives market activity indicates that investors are hedging against the possibility of fewer rate cuts than the Federal Reserve's projections. Demand for options referencing the Secured Overnight Financing Rate (SOFR) is concentrated on contracts targeting only one more rate cut by the Federal Reserve this year. In the futures market, positions betting on bond price increases have seen a wave of liquidation.
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