Treasuries Hit as Hawkish Fed Views Keep Piling Up

Market-implied expectations for Fed rate cuts — which have collapsed in the past two weeks — declined further this week after Chair Jerome Powell signaled policymakers will wait longer than previously anticipated to ease policy.

An initial quarter-point reduction remains priced in for November.

The Fed may not cut interest rates at all this year with inflation remaining high, said JPMorgan Chase & Co. President Daniel Pinto.

“It may take a bit longer until they can cut rates,” Pinto said at a Semafor event in Washington, adding that the likelihood of a rate hike is “very, very low” amid widespread skepticism that inflation will ease any time soon.

The Fed isn’t in any hurry, as a rate cut that comes too early would be “painful” and probably cause a recession, he said.

The market’s biggest worry right now is inflation, which is re-accelerating and throwing cold water on the idea of any rate cuts in 2024, let alone one or two, according to Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management.

“We are firmly in the camp of no rate cuts in 2024,” he said. “We believe investors should prepare for a higher for longer regime when it comes to both inflation and interest rates and that investment portfolios should be positioned for these dynamics for the foreseeable future.”

“With rate cuts delayed, rather than canceled, in our view, we still expect the yield on the 10-year U.S. Treasury to end the year around 3.85%, said Mark Haefele at UBS Global Wealth Management. “Once the Fed begins cutting rates this year, the bond market will likely continue to price a sequence of further cuts into 2025 and beyond.”

While timing the market is hard, investors can more confidently add duration exposure, according to Bank of America Corp. strategists led by Mark Cabana, who recommend “going long” five-year Treasuries.

The trade is supported by “Fed unlikely to hike, risk asset sensitivity to rates and cleaner duration positioning,” they noted.