Bond traders no longer view the odds of a Federal Reserve rate cut this year as better-than-even.
(Bloomberg) — Bond traders no longer view the odds of a Federal Reserve rate cut this year as better-than-even.
As recently as mid-January it was an article of faith that the Fed’s eight rate increases in the past year had sown the seeds of a recession that would require the central bank to reverse course. Since then, persistently strong employment data and sticky inflation have traders looking for a higher peak in the central bank’s policy rate and a prolonged stay at that level.
This is evident in the implied interest rates of futures contracts linked to the Secured Overnight Financing Rate, a short-term benchmark influenced by the policy rate. During January, the December 2023 SOFR contract’s rate was as much as 64 basis points lower than the highest expected rate for the year, which was then in June. That indicated two or three quarter-point cuts, the standard size, were seen as likely.
Fast forward to this Tuesday, and the December rate — which is volatile — is only about 12 basis points lower than the peak rate, which has increased to around 5.42% in the July-September window. That’s around half of a quarter-point increment, suggesting the market is torn over whether there will be a move down at all this year.
To some it looks like a rush to judgment. The June-December SOFR curve appears to have narrowed too much after the shifts of the past month, Citigroup Inc. strategists Ed Acton and Bill O’Donnell said in a note. Traders “may want to take some ticks off the table here” to assess whether this proves to be an overshoot.
Last week, the market fully priced in a quarter-point rate increase in June, following expected moves in March and May. Also, Wall Street economists have been revising their forecasts to call for a June hike.
–With assistance from Liz Capo McCormick.
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