Traders are increasingly turning to bets that a U.S. recession is expected to halt the pace of sharp interest rate hikes by the Federal Reserve, with bond markets pricing in a 50 basis point cut next year.
Traders expect interest rates to be close to 3.11% by December next year, down more than 3.62% from a peak of 3.62% in March, according to an interest rate swap contract tied to the 2023 Federal Reserve meeting on Wednesday, June 29, ET. 50 basis points.
With more and more economic indicators “collapsed” and consumer sentiment further deteriorating, market fears of a U.S. recession have deepened, and expectations around a possible peak in the Fed’s policy rate and the fed’s subsequent rapid reduction in benchmark interest rates are gradually increasing. Increase.
As mentioned in an earlier Wall Street News article, the overall business activity index for the June Texas Manufacturing Survey released by the Dallas Fed this week plummeted to -17.7 from -7.3 in May, the lowest since May 2020 ; and 6 The Richmond Fed’s manufacturing index was -19 in May, the lowest since May 2020, and the best leading indicator for judging a U.S. economic recession – the number of continuous jobless claims has risen from a low of 166,000 in March to 22.9 last week Wan…”Musk’s recession” may be a slap in the face .
U.S. Treasury rates fell sharply in the middle of the month as traders’ expectations that the Fed’s benchmark rate could peak above 4 percent have fallen and expectations for a potential rate cut after peaking have grown.
Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities, said:
We had expected expectations for terminal rates to be volatile, and that has been the case in the past. We don’t know where the Fed will stop.
Federal Reserve Chairman Jerome Powell delivered a speech on Wednesday, reiterating his long-standing view that the U.S. economy is strong enough to deal with tightening monetary policy, households and businesses are financially sound, and the labor market is “very strong” and a recession should be avoided; Raise interest rates “quickly” and strive to enter areas that limit economic growth as soon as possible.
But he also admitted that in the context of the sudden outbreak of conflict between Russia and Ukraine, the task of achieving a “soft landing” has “obviously become” more challenging in recent months, “there is no guarantee of a successful soft landing, and the path to achieve a soft landing has changed. narrower.” He said the longer high inflation persists, the more difficult the path to a “soft landing” will become, as it increases the likelihood that public inflation expectations will spiral out of control.
U.S. Treasury yields came under pressure across the board on Wednesday as expectations for inflation fell sharply along with gasoline prices, and the pain in the stock market drove investors to U.S. Treasuries. In late New York trading, U.S. Treasury yields fell 5-8 basis points across the board, led by the 5-year nominal yield, which once fell to 3.15%. The breakeven rate on 5-year inflation-protected bonds, seen as an indicator of expectations for the consumer price index, fell as much as 14 basis points to 2.61%.