NEW YORK: The Federal Reserve (Fed) has been signalling for months that further interest-rate cuts were far from guaranteed.
On Wednesday, that message finally fully sunk in for bond traders.
US Treasuries slumped and short-term yields soared to their highest since August after Fed chair Jerome Powell said central bankers needed to see progress on inflation before reducing their target rate further.
On paper, policymakers maintained their median projection for one rate cut this year. But it was Powell’s comments that tipped the balance for traders.
Interest-rate markets showed the probability of even one reduction as essentially a coin flip – with the war in the Middle East and spike in oil only adding to a fraught debate.
Declines in the US$31 trillion market on lifted yields on two-year notes – most sensitive to the Fed’s policy changes – as much as 10 basis points to nearly 3.78%, the highest in seven months. The 10-year note’s yield rose as much as seven basis points to 4.27%.
It’s not the first time the market has has been forced to realign in the face of Fed messaging, but the moves were sharp.
Powell in his comments noted that as a group, there was “meaningful” movement towards fewer cuts, and confirmed that some talk surfaced, as it did in January, about the possibility of the next move being a rate hike.
“If you look at the progression of the language over the last six months, the conviction on rate cuts has gone towards a conviction of maybe a rate cut, to we could be talking about a hike,” said Robert Tipp, head of global bonds and chief investment strategist at PGIM.
Just three weeks ago, traders were leaning toward three Fed rate cuts this year as jitters swept financial markets over potential disruption from artificial intelligence and cracks in the private credit market.
That anxiety helped drive a nearly rally in Treasuries in February, their best monthly performance in a year. Losses so far in March have all but erased those gains.
Two-year yields have increased 38 basis points this month – heading for the biggest monthly surge since October 2024, as crude oil jumped. — Bloomberg
