Burned Before, Bond Markets Resume Rate-Cutting Trades Worldwide

Bond traders are cautiously reloading wagers that burned them just weeks ago as the Federal Reserve and key global peers finally appear set to begin reducing interest rates as soon as June.

Previous bets that central banks would be swift to loosen monetary policy in 2024 backfired after authorities maintained their focus on above-target inflation and resilient demand. But last week’s surprise cut in Switzerland and dovish outlooks from Fed Chair Jerome Powell and his counterparts at the Bank of England and the European Central Bank leave investors with reason to once again position for easing.

Among money managers such as Pimco and BlackRock Inc., and one-time bond king Bill Gross, the prospect of lower rates is boosting the allure of shorter-dated obligations due in around five years or less, which stand to gain the most as rate-cut speculation builds.

That sort of outperformance relative to longer maturities is a recipe for so-called steepener bets, where the yield curve returns to a traditional upward slope. Of course, there’s still the risk that central banks again fail to vindicate the bullishness around shorter tenors given inflation remains sticky and labor markets continue to hold up.

Reloading Steepener Bets

“Whether we actually get what is priced in is a moot point, but for the current direction of travel, the promise is all that matters for now,” said Jim Reid, Deutsche Bank AG’s global head of economics and thematic research. While markets are focused on a “dovish narrative, it’s worth bearing in mind that sentiment on rates has switched back and forth over 2024,” he said.

Indeed, Reid and his colleagues reckon markets have pivoted towards dovish policy seven times in this cycle and on the last six occasions the outcomes were actually hawkish.