Bond traders are approaching the market with caution as they consider re-entering wagers that backfired just weeks ago, with the Federal Reserve and other key central banks signaling potential interest rate reductions starting as early as June.
Previous bets on swift monetary policy easing in 2024 were dashed when central banks maintained their focus on above-target inflation and strong demand.
However, last week’s unexpected rate cut in Switzerland and dovish comments from Fed Chair Jerome Powell, as well as counterparts at the Bank of England and the European Central Bank, have reignited speculation about rate cuts.
These are maturing in around five years or less, increasingly attractive as expectations of rate cuts grow. These shorter tenors stand to benefit the most if rate-cut expectations materialize.
This trend toward shorter maturities often leads to bets on a steeper yield curve, where shorter-term yields fall more than longer-term yields.
However, there’s still a risk that central banks may not fulfill expectations for rate cuts, especially with inflation remaining stubbornly high and labor markets showing resilience.
Jim Reid, Deutsche Bank AG’s global head of economics and thematic research, noted that while markets are currently focused on a dovish narrative, sentiment on rates has oscillated throughout 2024.
The outcomes were hawkish as it highlights that markets have shifted towards expecting dovish policies seven times in this cycle but on the last six occasions.
However, it rallied towards the end of the year as expectations grew that policymakers would cut rates in early 2024.
