Bond Bulls Fixated on Fed-Rate Cuts Risk Getting Smacked Around

Bond traders are growing more convinced that US yields are heading lower as they bet on a series of Federal Reserve interest-rate cuts, yet the path to cheaper borrowing costs is set to be extremely bumpy.

Having endured some major swings last year, US Treasuries rallied into the end of 2023 as investors latched on to signs inflation was cooling and central bankers opened the door to rate-cut speculation. While markets have been choppier to start the year, traders have become only more resolute that substantial monetary easing is in store, and soon.

Fresh readings on jobs and inflation — capped Friday by an unexpected decline in producer prices — left markets pricing in an 80% probability that rate cuts will start in March and sent yields on benchmark US two-year notes to the lowest since May. That’s even as Fed officials continued to advocate a more gradual pace of reductions this year.

Until this standoff is resolved one way or the other, some gyrations may be in store. The uncertainty underlying this tension is also evident in wide-ranging forecasts for longer-term yields, setting the stage for some big winners and losers. It’s unlikely that data and Fed speakers slated for the upcoming holiday-shortened week will provide any decisive clarity.

Ten Year Treasury Yield Hovers Close to 4% Level

The Fed is going to “wait a long time to make sure they have evidence” of disinflation, Robert Tipp, chief investment strategist at PGIM Fixed Income said on Bloomberg Television. “And the evidence, the data, is bouncy. So a posture here that makes a lot of sense is to be relatively neutral as it’s going to be a trading-range environment.”