Investing.com – Bond traders changed hands this year, as bets on monetary policy easing in June fell below 50% after a gauge of US manufacturing activity showed expansion for the first time since 2022.
The amount of rate cuts quoted in swap contracts for this year fell to less than 65 basis points — less than Fed policymakers themselves had expected — after the Institute for Supply Management (ISM) manufacturing report for March beat all economists’ estimates. This raised two- to 30-year yields by about 10 basis points or more during the day, among the largest daily increases this year.
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The index for March recorded 50.3 points, while expectations were for it to score 48.5 points, and the previous reading was 47.8 points.
Rate expectations were already changing ahead of the ISM data release as traders reassessed monetary policy expectations based on economic numbers and dovish comments from Federal Reserve Chair Jerome Powell on Friday, when US markets were closed.
Personal income and spending data for February were released on Friday, showing that consumption remains strong while progress towards lower inflation has stalled. Later, Powell reiterated that the Fed wants to be more confident in the direction of inflation before cutting interest rates, and that strong labor market conditions mean there is no urgency.
Based on these developments, traders have already begun to reduce their bets on a lower rate cut than the central bank forecast indicated on March 20. Earlier last week, Federal Reserve Governor Christopher Waller went further, saying that recent economic data warranted delaying or reducing the number of cuts this year.
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“Powell and Wheeler don’t appear to be in a rush to cut interest rates,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. However, the company remains optimistic about the bonds based on the possibility of weak economic data, he added.
March employment data due on Friday is expected to show the slowest pace of job creation in several months, although the US unemployment rate remains at historically low levels under 4%.
Also on Monday, several new corporate bond offerings were planned — after a record pace in the first quarter. In addition to imposing supply-related pressures on Treasuries, strong private borrowing suggests that the level of interest rates is not constraining US companies. The rise in crude oil futures prices to the highest level since November also confirmed the strength of the US economy.
The rise in yields comes after the first monthly gain for the Treasury market since December. This came after losses in January and February resulting from the erosion of implicit market expectations for interest rate cuts from the Federal Reserve, while the market stabilized in March after monetary policymakers maintained their expectations of the possibility of cuts of three-quarters of a percentage point this year.
At the beginning of the year, the amount of easing planned for 2024 exceeded 150 basis points. For some, this prediction was based on the view that the US economy will slow significantly due to the Federal Reserve raising interest rates 11 times over the past two years. Since then, economic growth data has largely exceeded expectations, while the downward trend in inflation has slowed.
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