Bond Market’s Big Rate-Cut Wager Faces a Reckoning From the Fed

The bond market’s bold bet on US interest-rate cuts is set for its biggest test yet.

After loading up on wagers that the Federal Reserve will lower rates by more than 100 basis points in 2024, investors are waiting on tenterhooks to hear Chair Jerome Powell speak Wednesday and see central bank officials’ so-called dot-plot outlining the path of US monetary policy.

While traders trimmed their expectations for cuts in the wake of an inflation report on Tuesday — and recent positioning data suggests some are now more neutral on Treasuries than a few weeks ago — the market remains heavily invested in a Fed pivot. If the message is instead one of higher-for-longer rates, a rapid unwind of those bets will likely follow, spreading pain across the market.

“If we get a message from the Fed that the timing” of expected rate cuts “is simply going to shift, but there is maybe three or four cuts in the cards over the next 18 months, the market can deal with that — and it will deal with that well,” David Lebovitz, global market strategist at JPMorgan Asset Management, said on Bloomberg Television. “What will give the market indigestion is if the Fed sends a hawkish signal that we will not get those three or four cuts.”

Fed Swaps Steady After November CPI Data