By Gertrude Chavez-Dreyfuss
NEW YORK- Many bond investors are keeping a defensive stance in managing their portfolios ahead of this week’s Federal Reserve policy meeting, as they brace for the end of the monetary policy tightening cycle this year and possible interest rate cuts sometime in 2024.
Investors widely expect the US central bank’s policy-setting Federal Open Market Committee will keep its benchmark overnight interest rate steady in the 5.00 percent-5.25 percent range at the end of a two-day meeting on Wednesday. The federal funds futures market, however, has factored in a roughly 70 percent chance of a rate hike at the meeting in July, and about 100 basis points of easing over the next 12 months.
Fed Governors Christopher Waller and Philip Jefferson last month laid out the options for the June 13-14 meeting. Waller said he is concerned about the lack of progress on inflation, and while skipping a rate hike this week may be possible, an end to the hiking campaign isn’t likely.
Jefferson said that “skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.”
For fixed-income investors, that uncertainty of not knowing what the Fed will do has made them wary of making big, risky bets, preferring to stick to high-quality assets such as Treasuries and highly-rated investment grade bonds.
“Going into high-quality fixed income specifically on the front end and going into cash, which provides a competing asset class because of the yield you get, are a good safety valve to have, with all the uncertainties popping up,” said Rob Daly, director of fixed income and managing director at Glenmede Investment Management.
There are indeed plenty of signs in the economy to be worried about, market players said.
The US labor market, for one, is cooling, with a large drop in household employment and an increase in the unemployment rate in May.
