New fears over a recession-inducing credit crunch have led U.S. bond market bulls to speculate that the Fed will make the sharpest policy shift in nearly 40 years. floated for a while.
Just minutes after the Federal Open Market Committee’s (FOMC) rate hike decision on Wednesday, traders increased speculation that a rate cut was imminent, prompting a policy move as early as July. Incorporated conversion.
Wednesday’s U.S. jobs report muted that view, and Wednesday’s April CPI reading is expected to show little progress toward the Fed’s 2% target. there is But a key indicator of economic health that traders have largely ignored for years is cause for concern. The Fed’s quarterly survey of senior loan officers is one of them, and also includes indicators of business confidence among small businesses and usage of the central bank’s emergency lending facility.
So while headline data suggests the U.S. business cycle is more resilient than expected and high inflation continues to push bond yields higher, the financial outlook may be bleak. I’m saying that.
“If the credit crunch trend continues, it will be difficult to sustain strong economic growth,” said Kathy Jones, chief fixed income strategist at Charles Schwab & Co. Ultimately, lower interest rates will be necessary. would,’ he said.
The question is how fast. It will be the first time since October 1987 that the Fed will cut interest rates just two months after raising them. Greenspan, then chairman of the Fed, cut interest rates sharply after Black Monday.
This time, the Fed will still have to strike a particularly difficult balance between a resilient labor market, high inflation and rising financial risks. The FOMC last week decided to raise interest rates for the 10th consecutive meeting, setting the target for the Federal Funds (FF) interest rate to 5% to 5.25%. While leaving open the possibility of another interest rate hike, the Fed’s statement removed the wording that it expects that possibility.
Roger Hallam, global head of rates at Vanguard Asset Management, stressed that the Fed’s policy trajectory would depend on further data, but said the Fed “recognized that there was clearly significant stress in the banking sector. I do,” he pointed out. A systemic crisis has been averted, but the challenges remain unresolved, he said.
That means a volatile market for bond investors, especially five-year Treasuries, which are subject to the long-term outlook for U.S. policy rates. Though expectations for a July rate cut had largely receded by the close of trading on Thursday, interest rate derivatives markets continued to expect a 0.25 percentage point cut by September, with a total of three rate cuts expected by the end of the year. .
news-rsf-original-reference paywall">Original title:Bond Traders Bet on Biggest Fed Shift in Decades on Credit Risks(excerpt)
2023-05-07 04:57:03
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