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Investors are becoming increasingly convinced that the Federal Reserve will no longer raise interest rates, following a surge in US borrowing costs. Yields on Treasury bonds hit their highest levels in over a decade this week, which could slow down the economy and reduce prices. Mary Daly, president of the San Francisco Fed, recently stated that the central bank does not need to rush any decisions about interest rates, especially since the labor market is cooling and inflation is stabilizing. If these conditions continue, further action from the Fed may not be necessary.
Daly’s comments come just before the release of a US monthly payrolls report that is expected to show a modest slowdown in hiring. The benchmark 10-year Treasury yield touched levels not seen since August 2007, while the 30-year Treasury yield reached a 16-year high. Though yields have since eased, investors are now less likely to expect any new rate increases. Market futures indicate a 30% chance of a quarter-point increase by December, down from 40% last week and over 50% a couple of weeks ago.
Priya Misra, a portfolio manager at JPMorgan Asset Management, noted that the bond market responded to the Fed’s “higher for longer” approach by effectively tightening on its own. She believes that the recent rise in Treasury yields offsets the need for further rate increases this year. Similarly, Mike Cudzil, a senior bond portfolio manager at PIMCO, suggests that the Fed has already squeezed the economy enough to control price pressures with the current interest rates.
Traders no longer anticipate rate cuts from the central bank next year, as their expectations for rate reductions have decreased. They now predict that the policy rate will fall to 4.5% to 4.75% by the end of 2024, implying three quarter-point reductions from the current levels. At the beginning of September, traders expected at least one additional cut. Other Fed officials, such as Loretta Mester of the Cleveland Fed, have acknowledged the recent market fluctuations and their impact on future rate rise decisions. However, the final decision will depend on how the economy evolves.
In summary, while the recent sell-off in bonds has increased concerns about the potential dysfunction in the market, the US Treasury’s increased borrowing to cover budget deficits is also contributing to the rise in yields. Marc Giannoni, chief US economist at Barclays, believes that if yields continue to rise rapidly, it could discourage further action from the central bank. Nevertheless, he still expects one more interest rate increase this year.
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