Bond Traders Are Now Betting On 100 BPS Rate Cut by 2024
NAIROBI (CoinChapter.com)—Bond traders are placing strong bets on a 100 basis point (bps) rate cut by 2024, driven by fears of an economic downturn.
The probability of such a drastic move has led to a surge in Treasuries as traders anticipate the Federal Reserve might need to ease monetary policy aggressively to prevent a recession.
Traders have placed substantial bets on a rate cut occurring during upcoming Federal Reserve meetings, with the Sept. 18 meeting showing a 95% chance of a rate cut, while the Nov. 7 and Dec. 18 meetings show a 96% and 98% probability, respectively.
The large bets, totaling over $9 million, indicate a high level of confidence in the likelihood of rate reductions.
Weak Economic Indicators Intensify Rate Cut Hopes
Recent economic data has intensified speculation about a 100 bps rate cut. Futures on the Secured Overnight Financing Rate (SOFR) and the Federal funds rate have priced in the potential for an inter-meeting rate cut.
Aug. 2024 SOFR futures indicate a likely 25 bps reduction, while September futures suggest a 100% chance of at least a 50 bps cut.
As of late Aug. 6, SOFR stood at 5.33%. In fed funds futures, the market has priced in a 25 bps easing in Aug., with expectations for approximately 122 bps of cuts for 2024, down from 140 bps earlier.
These expectations escalated following a weaker-than-expected jobs report on Aug. 2, which triggered a sell-off in stocks and a plunge in U.S. Treasury yields due to increased safe-haven demand.
Fed’s Tightrope: Will They Cut Rates to Avoid Recession?
Despite the growing speculation, some market participants remain doubtful about an emergency rate cut before the Fed’s scheduled meeting on Sept. 17-18.
Jim Caron, chief investment officer at Morgan Stanley Investment Management, remarked, “The Fed is not there to support financial market prices because people are upset with their returns. Their job is to see that markets are functioning properly.”
Fed policymakers have sought to reassure markets, stating that they do not foresee an immediate recession. However, they have indicated that rate cuts might be necessary to avoid economic stagnation.
On Aug. 5, U.S. Treasury yields remained down but had rebounded from their lows, supported by a recovery in the U.S. services sector index.
The Institute for Supply Management’s (ISM) non-manufacturing purchasing managers index increased to 51.4 in July from 48.8 in June, indicating a recovery in new orders and employment.
The report tempered expectations for immediate rate cuts, alongside remarks from Chicago Fed President Austan Goolsbee, who advised caution in response to market volatility. Goolsbee highlighted the Fed’s focus on employment and price stability, noting that the law prioritizes these over stock market performance.
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