There are signs that US bond traders are currently increasing their short bets on treasury bond bonds and buying derivatives to prevent selling, so as to deal with the risk that the Federal Reserve may reduce its estimate of interest rate cut within the year tonight
Although the Federal Reserve is almost certain to maintain interest rates unchanged on Wednesday, trading data shows that people are increasingly concerned that the latest dot matrix forecast from the Federal Reserve will show a growing unwillingness to take proactive action in easing monetary policy.
The interest rate chart forecast for December last year showed that Federal Reserve policymakers plan to cut interest rates three times in 2024. But since then, the US economy has continued to show surprisingly strong momentum, and inflation rates remain stubbornly above the Federal Reserve's target of 2%.
Bryce Doty, Senior Portfolio Manager at Sit Investment Associates, stated in a note to clients that "the bond market is preparing for the Federal Reserve's release of hawkish information on Wednesday."
Beware of the dot matrix diagram "releasing eagles"
Due to the weakening expectation of the Federal Reserve's significant policy easing, the US bond yield has seen a significant increase so far this year, causing new losses for many bond market bulls who only managed to ease their grip last year.
In late December last year, traders in the interest rate futures market were almost certain that the Federal Reserve would open the door to rate cuts at tonight's meeting and take a total of six 25 basis point rate cuts by the end of the year. However, since then, traders have continuously reassessed the outlook for the Federal Reserve's interest rate direction within the year. Currently, it is expected that there will only be about three rate cuts in 2024, which is basically consistent with the Federal Reserve's interest rate chart forecast for December.
Prior to tonight's interest rate meeting, many industry insiders anticipated that the Federal Reserve's latest chart may reflect even fewer rate cuts - only two this year. If such hawkish signals are ultimately released, it is likely to further exacerbate the selling trend in the bond market.
Jeffrey Senior Economist Tom Simons pointed out that he expects decision-makers' median forecasts to show the benchmark interest rate reaching around 4.88% by the end of this year - which means there will only be two 25 basis point rate cuts throughout the year.
He said that the Federal Reserve's actions will to some extent solve the problems brought about by the loose financial environment this year - the most typical of which is the rise of the stock market. Simons believes that "if the Federal Reserve maintains its interest rate (dot chart) forecast unchanged, they will face the risk of pushing financial conditions towards easing again, which will hinder their efforts to push inflation rates towards the 2% target."
The US bond market is on high alert
Since the prediction that the Federal Reserve will cut interest rates later this year is still widespread, there are actually some bullish signs in the US treasury bond bond market. For example, JPMorgan's latest customer survey shows that although there has been an increase in short positions, the number of long positions is also on the rise, and it has now reached its highest level since January 29th.
But it is obvious that the concern in the bond market is now stronger.
Although the yield of US Treasuries generally fell on Tuesday, on Monday, the yield of two-year treasury bond bonds most closely related to the Fed's interest rate expectations once hit the highest level in the year, rising to 4.75%. Mark Cabana, head of interest rate strategy of Bank of America, predicted on Tuesday that if the new dot matrix of the Federal Reserve showed that only two interest rate cuts were made this year, the yield of two-year treasury bond bonds would rise by another 10 basis points.
Advance reaction of derivatives
The futures and options markets have shown investors a cautious attitude towards this risk.
On Monday, the open interest in two-year US Treasury futures increased significantly, in line with the emergence of newly established short positions. At the same time, the market also saw a large number of purchases of put options on five-year treasury bond bonds. It is expected that the yield of five-year US bonds will rise to 4.45% on Friday and 4.3% late Tuesday.
Traders are still using options linked to guaranteed overnight financing rates to prevent the Fed's hawkish shift, closely tracking the central bank's policy path with guaranteed overnight financing rates. On the further treasury bond bond option curve, there are also many activities to hedge against rising yields.
Michael Lorizio, senior fixed income trader at Manulife Investment Management, said, "The data is really too high, especially the economic data at the beginning of the year. Given that economists with rich experience and resources have said that these data are greatly influenced by seasonal factors, I believe that before drawing any significant conclusions, we do need to take a careful look, and the Federal Reserve also needs to observe the direction of things."