Is the central bank set to slash rates soon?
By Ye Xie
Shorter-term Treasuries outperformed in a volatile session Wednesday that saw traders continuing to boost wagers that the Federal Reserve will lower interest rates in coming months.
The rally pushed yields on two- and five-year notes lower by about one basis point, while yields on 30-year bonds were little changed. The gap between the five- and 30-year bonds is approaching levels last seen in 2021.
The so-called curve steepening — a bet that shorter-term bonds will outperform longer-term counterparts – has been popular among bond investors. It’s a wager that the Fed will lower rates eventually while concern about more debt issuance will put pressure on longer-term bonds.
“Short-term rates can come down, but we are not so convinced that long bonds can do the same,” said Dan Carter, portfolio manager at Fort Washington Investment Advisors. “We favor a steepening curve. It could work in a number of scenarios – either the Fed will cut more aggressively, or the market becomes a bit more concerned about the fiscal outlook.”
Bonds initially sold off as crude oil snapped a two-day decline, but gradually recovered midday. The gains held through the close even as an auction of $70 billion in five-year notes saw weaker demand than expected and the Fed unveiled a proposal to ease capital requirements for large banks, which could free financial institutions to hold more Treasuries.
Traders have been increasing bets on the central bank easing policy after two Fed governors, Christopher Waller and Michelle Bowman, signaled they would be open to lowering rates as soon as July if inflation remains contained.
Fed Chair Jerome Powell, however, remains very cautious, reiterating Wednesday that the Fed is in no rush to lower rates as officials are still struggling to determine the impact of tariffs on consumer prices.
Interest-rate swaps showed that traders have fully priced in a rate cut by September and see about a one-in-five chance for a move in July.
Copyright Bloomberg News
