Treasuries Rally as Powell Locks in Bets on a September Rate Cut
Treasuries rallied after Federal Reserve Chair Jerome Powell’s speech at Jackson Hole cemented expectations that the central bank will cut interest rates next month.
The advance pushed yields lower by at least 4 basis points across the curve. Ten-year yields dropped 5 basis points to 3.8%, while two-year rates fell to about 3.94%, from 4% Thursday.
“This is a relief rally,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “It is a confirmation to the market that Powell is on his track to cut rates, even though he is still data dependent.”
While Powell didn’t provide clues on how fast the Fed will lower rates, the “market still needs his confirmation,” she said. “The balance of risk has changed from inflation to labor market worries.”
Overnight index swaps contracts showed that traders are betting that the Fed will lower the benchmark interest by at least a quarter point at the September policy meeting and priced in a more than 20% of a chance for a jumbo 50 basis points of easing. A total of 100 basis points of cuts are priced in for the year.
At the Fed’s annual symposium in Wyoming, Powell said, “the time has come for policy to adjust.”
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” Powell added. He also said the labor market slowdown was “unmistakable.”
What Bloomberg strategists say...
Jerome Powell ultimately told us what we already knew, albeit perhaps a little more forcefully than some of his colleagues. It all throws the focus squarely upon the next payroll figure in a couple of weeks, and beyond that, of course, next month’s FOMC announcement.
— Cameron Crise, Macro strategist. Read more on MLIV
Treasuries have been rallying since May as cooling inflation and a softening labor market prompted investors to bet that the Fed will start an easing cycle in September. A surprising rise in the unemployment rate fueled concern that the Fed may be too slow to bring borrowing costs down from the highest in more than two decades.
Since then, wagers on aggressive Fed easing have eased but the current pricing still suggests that the Fed will cut by half a point in one of three policy meetings this year.
Powell’s emphasis on labor market conditions is “really a clean turning point towards normalizing policy, which is more important than the 50 versus 25 basis point debate in September, in my mind,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investments.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
Bloomberg News provided this article. For more articles like this please visit bloomberg.com.
