Written by David Barbuscia
New York, February 7 (Reuters) – The Federal Reserve’s move to reconsider when to cut interest rates is reverberating through bond markets, raising risks for those expecting the explosive rally that sent bond prices higher at the end of 2023 to continue this year. .
Late last year, prices soared from 16-year lows as investors flocked to U.S. Treasuries on expectations that the Fed would cut interest rates as early as the first quarter of this year.
Many people are currently rebalancing their bets. US employment numbers explode A cautious message from the Fed, What I said last week If interest rates are cut too soon, a strong economy could trigger a rebound in inflation. The yield on the benchmark 10-year Treasury note has been rising inversely to prices, rising sharply in recent days and now 20 basis points above its December low.
Investors still expect the Fed to cut rates multiple times this year, but there is now less certainty about when the Fed will start lowering borrowing costs and how low interest rates will fall. . There are also concerns about a sudden increase in the supply of government-issued bonds. take away the bull’s enthusiasm.
“The combination of the jobs report and the Fed press conference made the potential outcome really divisive,” said Robert Tipp, chief investment strategist and head of global fixed income at PGIM Fixed Income, which manages $794 billion in assets. said.
He thinks the 10-year Treasury yield could move closer to last year’s high of about 5% this year, from its current level of about 4.1%.
Futures prices tied to the Federal Reserve’s policy rate late Tuesday showed investors believed the probability that the Fed would cut rates in March was about 20%, down from 64% a month earlier, according to data from CME Group. It was done.
At the end of last week’s monetary policy meeting, Fed Chairman Jerome Powell dismissed expectations for a March interest rate cut, saying officials needed more confidence that inflation was on track to reach the 2% target. .he reiterated his views While appearing on CBS ”60 minutes” on sunday.
Meanwhile, the probability of a first interest rate cut in May rose to 55% from 37% the previous month. Investors are now pricing in a total rate cut of 122 basis points in 2024, up from about 150 basis points in mid-January.
John Majiire, head of U.S. Treasuries and TIPS at Vanguard, the world’s second-largest fund manager, said ahead of last week’s Fed policy meeting that it would be a “buy on the spur of the moment” if the 10-year Treasury yield reached 4.25%. It showed the outlook.
“We’ll probably start scaling in at 4.25% based on our view that it could reach 4.5% in the future…with a longer-term scenario in mind,” he said.
For others, the decline in U.S. Treasuries confirmed suspicions that last year’s rally was overdone.
Spencer Hakimian, CEO of New York-based hedge fund Toolu Capital Management, has reduced his exposure to long-term Treasuries in recent weeks, warning that interest rates will remain higher for a longer period of time than the market expects. Exposure to short-term government bonds was added based on the forecast.
“We believe the interest rate risk is much smaller, so we have increased exposure to the tip of the curve,” he said. The risk that high interest rates will reduce bond payments is greater for long-term bonds.
With new U.S. bond issuance expected to reach nearly $2 trillion this year, many believe yields need to rise to attract buyers, investors are wary. is also increasing. U.S. fiscal concerns exacerbated October’s slide in Treasury stocks, and rating agencies Fitch and Moody’s last year warned of the strain on the Treasury from rising interest rates.
Matt Egan, a portfolio manager at Loomis Sayles & Co., expects the 10-year Treasury yield to reach 4.5%, due in part to the prospect of large government issuance.
In contrast to the spike in U.S. Treasury yields that began in September and October, the rise in yields has so far not had a significant impact on stock prices. The S&P 500 is up more than 4% since the beginning of the year and is near its all-time high.
At the same time, many believe that as long as inflation continues to trend downward, the direction of interest rates will continue to decline. Fed officials in December predicted a three-quarter point rate cut by the end of the year, and Powell recently said that outlook is likely still in line with policymakers’ views.
Jason Pride, head of investment strategy at Glenmede, said strong economic data will change the Fed’s timing, but not its direction.
“It doesn’t mean we can’t cut rates, it just means the pace of rate cuts will be a little slower,” he said.
Fed and stocks https://tmsnrt.rs/4985OPw
(Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Anna Driver)
((Davide.Barbuscia@thomsonreuters.com; +1 917 285 3067;))
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