Easing cycles: Traders work on the floor of the New York Stock Exchange as rising yields underscore how unique this economic and monetary cycle has been. Despite elevated borrowing costs, a resilient economy has kept inflation stubbornly above the Fed’s target. — AP
NEW YORK: Bond traders have rarely suffered so much from a Federal Reserve (Fed) easing cycle. Now they fear 2025 threatens more of the same.The US 10-year yields have climbed more than three-quarters of a percentage point since central bankers started slashing benchmark interest rates in September.
It’s a counterintuitive, loss-inducing response, marking the biggest jump in the first three months of a rate-cutting cycle since 1989.
Last week, even as the Fed delivered a third consecutive rate cut, 10-year treasury yields surged to a seven-month high after policymakers led by chairman Jerome Powell signalled that they are prepared to slow the pace of monetary easing considerably next year.
“Treasuries repriced to the notion of higher for longer and a more hawkish Fed,” said Sean Simko, global head of fixed-income portfolio management at SEI Investments Co.
He sees the trend continuing, led by higher long-term yields.
Rising yields underscore how unique this economic and monetary cycle has been.
Despite elevated borrowing costs, a resilient economy has kept inflation stubbornly above the Fed’s target, forcing traders to unwind bets for aggressive cuts and abandon hopes for a broad-based rally in bonds.
After a year of sharp ups and downs, traders are now staring down another year of disappointment, with treasuries as a whole barely breaking even.
The good news is that a popular strategy that has worked well during past easing cycles has gained renewed momentum.
The trade, known as a curve steepener, is a wager that Fed-sensitive short-term Treasuries would outperform their longer-term counterparts, which they generally have of late.
Otherwise, the outlook is challenging.
Not only do bond investors have to contend with a Fed that is likely to stay put for some time, they also face potential turbulence from the incoming administration of President-elect Donald Trump, who has vowed to reshape the economy through policies from trade to immigration that many experts see as inflationary.
“The Fed has entered a new phase of monetary policy, the pause phase,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
“The longer it persists, the more likely the markets will have to equally price a rate hike versus a rate cut.
“Policy uncertainty will make for more volatile financial markets in 2025.”
Bond traders were caught off guard last week after Fed policymakers signalled greater caution over how quickly they can continue reducing borrowing costs amid persistent inflation concerns.
Fed officials pencilled in only two quarter-point cuts in 2025, after bringing interest rates down by a full percentage point from a two-decade high.
Fifteen of 19 Fed officials see upside risks to inflation, compared with just three in September.
Traders quickly recalibrated their rate expectations. Interest rate swaps showed that traders haven’t fully priced in another cut until June. — Bloomberg
