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Business News/ Markets / Stock Markets/  Fed traders price in 100 basis points of rate cuts from May peak
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Fed traders price in 100 basis points of rate cuts from May peak

Bond traders ramped up bets that the Federal Reserve’s next move will be to cut interest rates and government debt yields plunged as investor flight from financial companies roiled global markets.

In the US, two-year Treasury yields plummeted as much as 54 basis points to 3.71%, the lowest level since mid-September, while German two-year rates fell as much as 51 basis points to 2.39%, heading for a record drop. (Getty Images via AFP)Premium
In the US, two-year Treasury yields plummeted as much as 54 basis points to 3.71%, the lowest level since mid-September, while German two-year rates fell as much as 51 basis points to 2.39%, heading for a record drop. (Getty Images via AFP)

Bond traders ramped up bets that the Federal Reserve’s next move will be to cut interest rates and government debt yields plunged as investor flight from financial companies roiled global markets.

Investors are now pricing in a drop of more than 100 basis points in the central bank’s policy rate by year-end as mounting concern about bank stability precipitated historic demand for havens, including government debt.

In the US, two-year Treasury yields plummeted as much as 54 basis points to 3.71%, the lowest level since mid-September, while German two-year rates fell as much as 51 basis points to 2.39%, heading for a record drop. Longer-maturity yields also tumbled, with the US 10-year falling as much as 31 basis points to 3.38%, approaching its January low.

The expected peak for the Fed policy rate slid to under 4.70%, with a less than a one-in-two chance of a single quarter-point hike at next week’s policy meeting. Expectations for higher rates in Europe also fell, with traders now seeing the Bank of England holding pat next week and a quarter-point hike by the European Central Bank at its meeting tomorrow now favored, down from a half-point last week. 

“The market is pricing in a Fed that might be forced to hike into a recession and thus will have to quickly turn around and cut," said Priya Misra, global head of rates strategy at TD Securities. Anticipating a reversal in June “is too soon, but the market is pricing in the risk of widespread tightening in financial conditions."

The Fed’s expected year-end rate is about 3.57%, more than a percentage point lower than the expected peak. 

The thinking is that stress in the global banking system — which exploded into the open in the past week with the failure of three US institutions and continues to sink share prices for large financial companies globally — will test the Fed’s resolve to raise rates further to get inflation under control. 

The repricing of Fed wagers occurred as a flight-to-quality bid swept through short-dated Treasuries, spurred by steep declines for European and US stocks. The catalyst was the latest slump in Credit Suisse Group AG shares after a top shareholder ruled out additional assistance to the Swiss bank. 

“All else being equal the Fed would want to go to 25, but if we have another high profile bank failure, it will become increasingly difficult for the Fed to pull off that quarter-point hike," said Ian Lyngen, head of rates strategy at BMO Capital Markets. 

In the UK, traders reduced tightening bets for next week’s Bank of England decision, seeing no hike as the most likely scenario. They had priced around an 80% chance of a quarter-point hike earlier.

Mixed economic data in the US morning gave pricing a further push, with a gauge of producer prices coming in slower than anticipated and a measure of New York manufacturing falling more than expected.

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This story has been published from a wire agency feed without modifications to the text.

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Published: 15 Mar 2023, 09:15 PM IST
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