NEW YORK: The bond market has ended its long flirtation with the US Federal Reserve (Fed) cutting interest rates by half a point this month as resilient inflation and labour market data reinforce a measured course of action.
Swap traders have fully priced in a quarter-point reduction at the Fed’s policy announcement next week.
The Treasury market ended lower on yesterday after a choppy session that started with a sell-off in the wake of inflation data.
The S&P 500 Index rebounded to close 1.1% higher after volatile trading.
“Both the bond market and the Fed need to see where the economy lands,” said George Catrambone, head of fixed income, DWS Americas.
Whether the economy is entering a soft landing that only requires a series of modest rate cuts, as seen in 2019 and 1995, or heading for a harder landing at some stage in the next year is the biggest conundrum for investors.
The policy-sensitive two-year yield initially rose as much as 9.5 basis points to 3.69%, with the 10-year note backing up four basis points to 3.68%.
At the end of the session, the front end remained higher by about five basis points.
“A point of pain is the front end as the market has priced in so many cuts,” said Catrambone.
The central bank has held rates from 5.25% to 5.5% since July 2023, and as inflation pressure moderated during the past 14 months, that policy setting has become increasingly restrictive.
This trend spurred Fed officials in recent weeks to set the stage for an easing cycle to start this month. — Bloomberg
