Bond Traders Predict Fed Interest Rate Cuts – Bond traders are struggling to predict how the Federal Reserve will cut interest rates.
After months of guessing how high the Fed would go, they now find it just as challenging to determine how low rates will fall. Some experts believe the Fed will need to lower rates more aggressively than expected, while others think the bond market has already priced in too much easing.
Dividing Views on Rate Cuts
Jamie Patton, co-head of global rates at TCW Group Inc., argues that the Fed must cut rates quickly and significantly. She believes this is necessary to tackle the still-high inflation. On the other hand, Bob Michele, chief investment officer for global fixed income at JPMorgan Asset Management, thinks the bond market is ahead of itself. He prefers corporate bonds over Treasuries, predicting that the economy will grow, even if at a slower pace.
Market Expectations for September
Traders are currently pricing in a quarter-percentage-point rate cut at the Fed’s upcoming meeting on September 18. Some banks are even betting on a half-point cut. By mid-2025, swaps markets expect rates to drop to around 3%, which is considered neutral for economic growth. However, the Fed’s trajectory has often surprised traders in the past. They underestimated how high rates would go and then bet too soon on a reversal, leading to losses.
Bond Traders Predict Fed Interest Rate Cuts – Risks and Economic Outlook
Some analysts warn that bond prices have risen too much and are now vulnerable to a pullback. The two-year Treasury yield has decreased from over 5% in April to about 3.7% now.
This suggests that the market is already pricing in several rate cuts. The Fed’s future actions will depend on whether it can achieve a soft landing for the economy or if it will have to act against a recession. Currently, economists believe the economy will avoid contraction.
The Fed’s Upcoming Moves
In the coming weeks, the Fed is expected to provide little guidance. Officials are in a blackout period ahead of their September meeting. The Fed’s actions will depend on whether inflation continues to decrease and if the economy remains strong. Saira Malik, chief investment officer at Nuveen, predicts that the Fed will likely cut rates more gradually than the market expects. She believes the 10-year yield could rise back toward 4% from its current level of around 3.7%.
Bond Traders Predict Fed Interest Rate Cuts – Key Economic Data Ahead
Several important economic data points are coming up:
- Sept. 9: Wholesale inventories; New York Fed 1-year inflation expectations; consumer credit.
- Sept. 10: NFIB small business optimism.
- Sept. 11: MBA mortgage applications; consumer price index; real average earnings.
- Sept. 12: Producer price index; jobless claims; household net worth change; monthly budget statement.
- Sept. 13: Import and export price index; University of Michigan sentiment/current conditions/expectations.
Fed and Auction Calendar
No public comments from Fed officials on monetary policy are expected before the upcoming meeting. Here’s the auction calendar:
- Sept. 9: 13-, 26-week bills.
- Sept. 10: 42-day cash management bills; 3-year notes.
- Sept. 11: 17-week bills; 10-year note reopening.
- Sept. 12: 4-, 8-week bills; 30-year bond reopening.
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