By Davide Barbuscia
NEW YORK- A sell-off in the US government bond market is picking up speed, as a strong economy whittles away at hopes for imminent interest rate cuts from the Federal Reserve.
Over the last month, investors have roughly halved the number of cuts they expect the Fed to deliver in 2024, amid booming job growth and stubborn inflation that have made the US central bank hesitant to ease monetary policy too soon.
That has exacerbated losses in bonds, complicating the outlook for investors who had bet Treasuries would rise as the Fed cut borrowing costs. Yields on the benchmark 10-year Treasury, which move inversely to bond prices and are guided in-part by interest rate expectations, have shot to 4.35 percent , their highest level since the end of November.
“Coming into 2024, nobody thought that inflation could go anywhere but down. It was a slam dunk that you would win by just positioning in bonds,” said Craig Brothers, senior portfolio manager and co-head of fixed income at Bel Air Investment Advisors. Now, “that trade is not working.”
Federal funds futures on Friday showed investors pricing in roughly 80 basis points of interest rate cuts this year, compared to some 150 basis points that had been expected at the beginning of January. Expectations of when the first of those cuts will come have been pushed to June, from March.
At the same time, the 10-year Treasury yield is up around 50 basis points from its December lows. Treasury prices hit a 16-year low in October only to come screaming back on expectations that the Fed was done raising interest rates and would move to cutting them this year.
Minutes from the Fed’s most recent monetary policy meeting showed officials concerned about cutting rates too soon and broad uncertainty over how long the central bank’s benchmark overnight interest rate should stay in the current 5.25 percent -5.50 percent range. A chorus of Fed speakers in recent weeks have reiterated that view.
The Fed’s hesitation to ease policy “is going to make it very hard for rates to fall much further from here, so fast money will have a tough time holding that position,” said Rich Familetti, chief investment officer of US total return fixed income at SLC Management. “The pain trade is higher rates and we will likely experience that.” – Reuters
