Bond traders have adjusted their expectations for interest rate cuts in 2024, aligning more closely with the Federal Reserve’s projected outcome. Forecasts now indicate that the Fed is unlikely to lower rates by more than 75 basis points this year, reflecting the consensus among policymakers.
Swap contracts, which forecast the decisions of the US central bank, have been repriced to anticipate higher rate levels. In afternoon trading in New York, the December contract reached 4.58%, a mere 75 basis points lower than the effective federal funds rate of 5.33%. The Fed’s target band for this rate has remained between 5.25% and 5.5% since July.
Market expectations have been converging towards the median of policymakers’ latest quarterly forecasts, issued in December. However, doubts persist regarding even this level of interest rate cuts, with some investors considering the possibility of additional rate increases.
Tony Farren, managing director in rates sales and trading at Mischler Financial Group, remarked, “The air has been taken out of the bubble of over-expectation of rate cuts.” He added that the current market is fairly priced.
Tuesday’s repricing coincided with a slight increase in Treasury yields during US afternoon trading, despite a successful auction of seven-year notes. Bond investors are also grappling with a surge in new corporate issuance, providing alternative opportunities for yield-seeking investors. In fact, investment-grade companies in the US sold more debt this month than in any other February on record.
While the pace of corporate bond offerings slowed from Monday, which marked the third-busiest day of the year so far, a gauge of February consumer confidence fell short of expectations.
Leah Traub, portfolio manager at Lord Abbett, expressed relief, stating, “My view in a word is ‘Finally!'” She noted that the market had been overly optimistic about the timing and extent of Fed cuts at the beginning of the year.
Fed policymakers have emphasized the need for additional evidence of inflation moving towards their 2% target before considering rate cuts. The release of the Fed’s preferred inflation gauge, the deflator for personal consumption expenditures, scheduled for Thursday, will provide further insight into price pressures following indications of higher-than-expected inflation in January.
Looking ahead, market participants anticipate Fed Chair Jerome Powell’s congressional testimony on March 7 and the release of February employment data the following day as key events shaping expectations for rate cuts this year.
