Traders expect interest rates to drop half a percentage point by July, and Treasury yields fall

U.S. Treasury yields plunged on Tuesday Consumer prices grew slower than expected Last month reinforced this view: The Fed’s most aggressive rate hike cycle It ended in a few decades.

The 10-year Treasury yield fell 21 basis points to 4.43, its lowest level since September 22. Meanwhile, the 30-year Treasury yield fell about 15 basis points to 4.61%. Swaps contracts used to hedge future actions by the Federal Reserve fell sharply, reducing the possibility of another interest rate hike to almost zero and delaying the expected rate cut to June, with a further 25 basis points cut in July. By the end of 2024, traders now expect the Fed to cut interest rates by a full percentage point.

Ten-year yields, a global lending benchmark, have plunged more than half a percentage point since hitting a 16-year high of 5.02% on Oct. 23. The bond market recovery came amid several wild drawdowns. The Fed kept its benchmark policy rate unchanged earlier this month, but it is rising.

“I do think the Fed is done,” said Tony Farren, director of rates sales and trading at Mischler Financial Group. “It’s clear that the peak of inflation is behind us. We also see Get to the point where yields are high, unless management of oil exceeds expectations.” $100 a barrel, and stay there for a while, then all bets are off. “

The U.S. consumer price index was flat in October, compared with the median estimate of a 0.1% increase in a Bloomberg economist survey; core CPI excluding food and energy rose by 0.2%, compared with the median estimate of 0.3%. Growth slowed to 4% from the expected 4.1%.

While markets expect the Fed to adjust policy quickly next year, some doubt that will happen that quickly given that inflation remains above the Fed’s target. In addition, U.S. central bank officials have repeatedly warned markets that they are in no rush to take action. Cut interest rates.

“I still think it will take time for inflation to come down, which will keep the Fed on hold longer than usual,” said Erin Browne, portfolio manager for multi-asset strategies at Pacific Investment Management Co. What you see in a cycle is longer.” Bloomberg TV said that “the Fed will not accept applause and bows based on one piece of data,” but will wait “to ensure that the data continues to confirm that inflation will fall.”

Overall, Pimco is bullish on bonds, sticking with their and others’ forecasts this year for 2024, which did not materialize.

Hopes are now growing that, as yields have fallen in recent weeks, bond investors can avoid what seemed certain to happen just a few months ago – a third consecutive year of losses for U.S. Treasuries. The broad index of U.S. Treasury bonds is down 1.2% this year through Monday, following unprecedented losses of 12.5% ​​last year and 2.3% in 2021.

Short-term yields also plummeted on Tuesday as traders expected the Fed to move faster to rate cuts.

Swaps show the effective funding rate will fall to nearly 4.33% by December 2024 from the current 5.33%.

“The bar for further rate hikes is now getting higher and higher,” Jay Bryson, chief economist at Wells Fargo, said on Bloomberg Television.

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