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(Bloomberg) — Bond traders are wary of the bets they wasted weeks ago as the U.S. Federal Reserve and major global peers appear poised to finally cut interest rates as soon as June. is being reloaded.
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Previous expectations that the central bank would ease monetary policy quickly in 2024 backfired as authorities continued to focus on above-target inflation and demand resilience. But Switzerland’s unexpected rate cut last week and the dovish outlook from Fed Chair Jerome Powell and his fellow Bank of England and European Central Bank chairmen gave investors reason to ease back.
Among asset managers such as Pimco and BlackRock, as well as one-time bond magnate Bill Gross, the prospect of lower interest rates is a big deal for short-term bonds that are most likely to benefit from interest rates, which are short-term loans due within about five years. It makes debt more attractive. -Cut speculation building.
This kind of outperformance relative to longer maturities is a recipe for a so-called steeper bet, where the yield curve reverts to its traditional upward slope. Of course, there remains a risk that central banks will once again be unable to justify a bullish stance on short-term interest rates, given that inflation remains high and the labor market continues to hold up.
“It’s debatable whether you’ll actually get what’s priced in, but given the current direction of travel, it’s possible to get what’s actually priced in. All that matters now is the promise.” He said markets are “focusing on dovish views, but it’s worth bearing in mind that interest rate sentiment will go back and forth into 2024.”
In fact, Reid and his colleagues believe that there have been seven times this cycle that markets have veered towards dovish policy, and that the results of the past six times have actually been hawkish.
2023 flickr
For now, investors are sensing a glimmer of what will happen in late 2023. At the time, the U.S. bond market was expected to be in the red for a third consecutive year, but stocks rose toward the end of the year as expectations that policy makers would cut interest rates in early 2024 swept global markets.
Although they appear to be working together now, each central bank may still move at different speeds, which could present money-making opportunities.
“The big central banks, the ECB, the Federal Reserve, the BOE, are all likely to start cutting interest rates in the middle of this year, and the similarities stop there,” Michael Kuzil, a portfolio manager at Pacific Investment Management, told Bloomberg TV. I guess so,” he said. . “Speeds and destinations vary around the world, which is great for fixed income opportunities.”
Interest rate traders are tipping the start of the Fed’s easing cycle to June, after kicking off the year in March. For all of 2024, it expects cuts to be slightly larger than the median estimate of 75 basis points (bp) among Fed officials. June is also when the market expects the ECB and BOE to start cutting interest rates, and at least some moves from both are priced in.
The Bank of Japan stands out among major central banks, with economists expecting it to raise rates again later this year after halting its easing program last week.
Bloomberg strategist says…
“If central banks have their way, the first rate cuts by the Fed, ECB, BOC, and BOE could all be completed and lifted by the end of the first half. This means there is no point in fighting them. This means that front-end yields in major countries will continue to trend downward.
— Ven Lam, Strategist
Click here to read the full report
election twist
For Kerry Wood of Schroders in Sydney, the dovish turn from most major central banks will likely make the bond market one of the best performing markets this year.
Still, she believes there is room for disagreement, especially with the U.S. presidential election looming in November.
“There’s little room for the Fed to cut rates by maybe 50 basis points before the election, but we think that’s as good as it can get,” said the firm’s deputy head of fixed income. Her portfolio is neutral on the US front end, but has bullish positions in European short-term bonds and UK government bonds.
The Treasury curve briefly steepened after the Fed meeting, but the two-year yield remains about 40 basis points above the 10-year yield. Starting around mid-2022, this curve has become that way, or upside down in trader parlance.
Fed officials last week upgraded their outlook for inflation and growth and reduced the amount of rate cuts they expect over the next two years, as investors make complex calculations about the extent of future steepening.
David Rogal, portfolio manager in BlackRock’s fundamental fixed income group, said the 2025 and 2026 revisions “indicate that the easing cycle is shallow.”
This suggests “some steepening of the curve”, he said, so the group is “underweight medium to long-term rates (7 to 30 years) in our portfolio”.
what to see
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Economic data:
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March 25: Chicago Fed National Activity Index. Bloomberg US Economic Survey. Newly built home sales.Dallas Fed Manufacturing Activities
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March 26: Philadelphia Fed Nonmanufacturing Activities. Durable goods. capital goods. FHFA Home Price Index. S&P Core Logic. Conference Board Consumer Confidence. Richmond Fed Manufacturing Index and Business Conditions.Dallas Fed Service Activities
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March 27: MBA home loan application. Wholesale inventory (revised)
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March 28: GDP (4th quarter). personal consumption. GDP price index. First unemployment insurance claim. Pending home sales. MNI Chicago PMI. University of Michigan sentiment and inflation expectations.Kansas City Fed Manufacturing Activities
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March 29: Personal income and expenses. PCE deflator. Advance goods trade balance. Retail and wholesale inventory.Kansas City Fed Service Activities
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March 29th: Good Friday.Trading in the US market has ended
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Fed Calendar:
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March 25: Atlanta Fed President Rafael Bostic.Governor Lisa Cook
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March 27: Governor Christopher Waller
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March 29: San Francisco Fed President Mary Daley.Powell
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Auction calendar:
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March 25: Bills for 13 and 26 weeks. 2 years worth of notes
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March 26: 42-day cash management bill. 5 years worth of notes
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March 27: Bill for 17 weeks. 2 year floating rate bond. 7 years worth of notes
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March 28: 4 week, 8 week bill
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–With assistance from Edward Bolingbroke and Greg Ritchie.
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