Bond market diverges from Fed projections again

Bond markets are pricing in expectations of more rate cuts from the Fed, also influenced by the CPI data. Although Fed projections now call for fewer rate cuts this year, bond markets are pricing in expectations of more rate cuts from the Fed, also influenced by the CPI data. Investors are forecasting two rate cuts this year, in November and December. In fact, after the Fed decision, the probability of the first rate cut in September was priced in as more than 50 percent in intermediate futures transactions. The US two-year bond yield, which is sensitive to the policy rate, also fell 17 basis points to 4.67 percent on Wednesday, reflecting the strong easing belief in the market. Investors are justifying their expectations of more rate cuts by Powell keeping his options open. Michael de Pass, Head of the Bond Desk at Citadel Securities, commented, “Powell clearly wants to keep his options open. Powell wanted to appear more balanced and make sure he didn’t fan the flames after the CPI data.” Akira Takei, director of Tokyo-based Asset Management One SGMK, said the Fed would accelerate policy changes if it showed a rapid deterioration in the labor market. That scenario has not yet been priced in, Takei said.