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Judging by the reaction of derivatives, US bond traders will finally no longer fight against the Fed

US Treasury traders are finally heeding the market’s oldest adage: Never fight the Federal Reserve.

When the Fed previously raised interest rates significantly,investPeople misjudged how high interest rates would rise, and as a result they suffered huge losses during the 2022 bond crash.

Early last year, investors believed that the bank collapse crisis would force the Fed to stop raising interest rates, but they made the wrong bet. When Fed Chairman Jerome Powell hinted in December that interest rate hikes would ended, investors were betting that there would be a sharp change in monetary policy and the Fed would start hiking in March this year.cut interest ratesHowever, the Fed itself did not predict this; However, investors have gradually learned to be compliant.

In the derivatives market, investors have begun to expect that the Fed will cut interest rates by only 4 percentage points or a maximum of 5 percentage points this year, which is slightly more than the 3 percentage points the Fed had estimated. Compared with last year, investors expected interest rates to be cut by 7 percentage points this year, slightly more than the Fed had predicted. The estimated decline is a full 1 percentage point larger.

Of course, the Fed’s projected tapering may be wrong; But if investors’ expectations are in line with Fed officials, at least they won’t be panicked by the Fed’s decision. In this way, it will provide a stable force to the financial market, and can allow bond market investors to take only limited risk after losing money for three consecutive years.

“Obviously we got a message from the Fed that they will be cutting insurance-type interest rates because they see that inflation is falling, so they’re going to want to avoid overly tight policies,” said Pogman, founder of Penso Consulting. Ready to cut rates.” in New York. leading to economic stability; “I think the market has now responded appropriately.”

The Fed’s policy direction will depend on whether inflation continues to decline, so the Fed’s outlook may also change in the future. Fed Chairman Jerome Powell has said he welcomes solid economic growth as long as it does not put downward pressure on consumer prices. The Labor Ministry will announce the January Consumer Price Index (CPI) on the 15th. Economists have predicted annual growth of 2.9%, the smallest increase since March 2021.

Inflation continues to decline, allowing the Fed to loosen its grip on monetary policy by lowering interest rates. This helps set the stage for the bond market. The current market consensus is thatYieldA return to last year’s peak is unlikely.

In this environment, strong demand emerged last week when the Treasury Department auctioned $42 billion in 10-year notes. Options market traders are now betting that bond yields will remain in a stable range until the Fed’s first rate cut, which is currently expected to come in early May.

Since the current gap between the Fed and the market on the extent of interest rate cuts expected this year is not large, the Fed itself is not very sure about the extent of interest rate cuts, so it cannot make significant changes to its forecast.

finance(tagstotranslate)interest rate cut


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