Fed traders price rate cut of 100 basis points from May peak

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(Bloomberg) — Government-debt yields fell globally on rising financial-stability concerns, prompting bond traders to bet on additional central-bank rate hikes and to begin pricing in cuts by the Federal Reserve.

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Investors priced in a more than 100 basis point drop in the US policy rate by the end of the year and reduced odds of additional hikes by the Bank of England and the European Central Bank. The latest plunge in bank stocks globally has fueled historic demand for government debt and other shelters.

In the US, the two-year Treasury yield fell 54 basis points to 3.71%, its lowest level since mid-September, while the German two-year rate fell 51 basis points to 2.39%, hitting a record low. Increasing. , Long-maturity yields also declined, with the US 10-year falling 31 basis points to 3.38%, near its January low.

The expected peak for the Fed policy rate fell to around 4.8%, with a quarter-point hike at next week’s policy meeting considered a coin toss. The Bank of England is seen to be holding pat next week, and is favored by a quarter point hike by the European Central Bank at tomorrow’s meeting, down from half a point last week.

“The fear is that it’s overshadowing everything,” said Ed Al-Husseini, rates strategist at Columbia Threadneedle Investments. US Treasury yields below the Fed’s current policy rate band of 4.5%-4.75% are “a strong signal that the market is surrendering to an easing cycle.”

The Fed’s expected year-end rate has dropped to about 3.6%, percentage point below the expected peak.

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The thinking is that tensions in the global banking system – which exploded into the last week with the failure of three US institutions and continue to slide in share prices for big financial companies globally – will get rates to be raised further. Will test the Fed’s resolve. Inflation under control.

Due to steep declines for European and US stocks, a revaluation of Fed bets resulted in a flight-to-quality bid via short-dated Treasuries. The catalyst was the latest plunge in Credit Suisse Group AG shares after a top shareholder refused to provide additional support to the Swiss bank.

“I think they should hold off,” Bob Mitchell, chief investment officer at JP Morgan Asset Management, said on Bloomberg Television, referring to next week’s Fed meeting. “I think hiking rates – either the ECB hiking rates this week or the Fed hiking rates next week – is likely to be the biggest default since the ECB hiked rates in June 2008 during the global financial crisis”.

Mixed economic data in the US morning further boosted pricing, with a gauge of producer prices coming in slower than expected and manufacturing in New York falling more than expected.

— With assistance from Liz Capo McCormick.

(Updated yield levels.)

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