NEW YORK: Bond traders priced in less monetary policy easing by the Federal Reserve (Fed) this year and briefly set the odds of a first move in June below 50%, after a gauge of US manufacturing activity showed expansion for the first time since 2022.
The amount of Fed rate cuts priced into swap contracts for this year dropped to fewer than 65 basis points – less than Fed policymakers themselves have forecast – after a report on ISM manufacturing for March exceeded all estimates in Bloomberg’s survey of economists.
A bond-market decline lifted two to 30-year treasury yields roughly 10 or more basis points on the day, among their biggest daily increases this year.
The selloff was already under way before the ISM data release as traders reassessed the outlook for monetary policy based on economic figures and cautious comments by Fed chairman Jerome Powell last Friday, when US markets were closed.
The ISM report “feeds into the narrative coming out of last week” whereby the economy’s resilience enables the Fed “to be patient”, said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
For the bond market, that means rates stay “higher for longer”.
Personal income and spending data for February released last Friday showed that consumption remains strong while progress towards lower inflation has stalled.
Subsequently, Powell reiterated that the Fed wants to be more confident in the inflation trend before cutting rates, and that strong labour market conditions mean there’s no urgency.
Based on those developments traders had already begun to price in less easing than indicated by the central bank’s March 20 forecasts.
Earlier last week, Fed governor Christopher Waller went further, and said that recent economic data warrants delaying or reducing the number of cuts seen this year.
“Powell and Waller don’t sound like they are in a hurry to cut rates,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
Still, the firm remains bullish on bonds based on the potential for economic data to weaken, he said.
March employment data to be released on Friday is expected to show the slowest pace of job creation in several months, though the US unemployment rate remains at historically low levels under 4%.
Also next Monday, several new corporate bonds offerings were planned – following a record first quarter pace.
In addition to putting supply-related pressure on treasuries, robust private borrowing suggests that the level of interest rates isn’t constraining US companies.
A rise in the futures price of crude oil to the highest level since November also underscored the strength of the US economy.
The rise in yields follows the Treasury market’s first monthly gain since December.
After losses in January and February caused by erosion in market-implied expectations for Fed rate cuts, the market stabilised in March after policymakers maintained their projection that three quarter-point cuts are likely this year.
At the start of the year, the amount of easing priced in for 2024 exceeded 150 basis points.
For some, that expectation was based on the view that the US economy would slow considerably due to the Fed’s 11 rate hikes over the past two years.
Since then, growth data has broadly exceeded expectations, while the downward trend of inflation has slowed. — Bloomberg
