Bond traders have been shorting US Treasuries and buying derivatives to protect against a sharp market downturn, given the risk that the US Federal Reserve could abandon expectations for interest rate cuts this year.
The Federal Open Market Committee (FOMC) is almost certain to leave the policy interest rate unchanged at its meetings on the 19th and 20th, but trading data indicates a new interest rate outlook that indicates a more dovish stance cautious towards monetary easing. that this view becomes stronger.
The US monetary authorities interest rate forecast distribution map (dotted plot) in December last year showed a forecast of three 0.25 point rate cuts within the year, but since then the economy has continued to show surprising strength, and the inflation rate has exceeded the authority targets.
“The bond market is bracing for a hawkish message from regulators on the 20th,” said Bryce Doty, senior portfolio manager at Sitt Investment Associates, in a note to clients.
Bond yields have risen this year as prospects of authorities accelerating monetary easing dimmed. Investor losses are mounting. At the end of December, futures traders had expected regulators to start cutting rates by the March meeting, with a total of six rate cuts by the end of the year.
Traders have since revised their forecasts, expecting around three rate cuts this year. However, if new interest rate forecasts show that policymakers expect fewer rate cuts, that could trigger another round of selling.
Tom Simons, senior economist at Jefferies, said in a note to clients that policymakers’ median rate forecast for the end of the year is around 4.88%. This is equivalent to two rate cuts of 0.25 points. He said the rate cuts were in response to easing financial conditions this year, as evidenced by the rise in stock prices.
However, there are still widespread expectations that interest rates will be cut later this year, and there are still some bullish signs in the government bond market. JPMorgan Chase & Co.’s latest customer survey. shows that while short trades are on the rise, outright long positions are also on the rise, now at their highest level since January 29.
However, in the US bond market on the 18th, the yield on two-year bonds rose to 4.75%, the highest level this year. Mark Kavanagh, head of US rates strategy at Bank of America (BofA), said on Tuesday that if the new dot plot suggested two rate cuts this year, two-year Treasury yields would rise by an additional 0.1 percentage point. The forecast showed.
US 2-year Treasury yield hits record high this year; Goldman reviews forecast for number of rate cuts
The options market shows that investors are preparing for these risks. On the 18th, open interest in 2-year bond futures increased significantly. This coincided with the construction of a new short site. There was also a lot of buying in five-year bond options on expectations that random yields would rise to 4.45% by the 22nd. The same day yield was around 4.3% on the 19th.
Shorts Building
Last week saw an increase in open interest as the contract was weighed down
Sources: CME, Bloomberg
news-rsf-original-reference paywall">Original title: Bond Short Bets Pile Up on Fear the Fed Will Dash Rate-Cut Hopes (excerpt)
#Treasury #Shorts #Grow #Fed #Sees #Risk #Reversing #Interest #Rate #Cut #Expectations #Bloomberg
