Bond Investors Brace For Potential Fed Pivot Towards Multiple Rate Cuts

The bond market is bracing for a potential policy shift by the Federal Reserve, with expectations of a move away from interest rate hikes to multiple rate cuts this year.

What Happened: Bond investors are gearing up for a possible change in the Federal Reserve’s interest rate policy. The central bank is expected to scrap its interest rate hike stance at its next policy meeting, pointing to potential rate cuts this year—the first since the COVID-19 pandemic began in 2020, reported Reuters on Monday.

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Portfolio managers are increasing wagers on long-duration U.S. Treasuries in anticipation of rate cuts. This is based on the prediction that yields on these bonds will fall as rate cuts are implemented. 

“We have throughout the past year suggested extending duration in anticipation of the cycle turning,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York.

“We have moved to longer duration for all the portfolios we manage,” said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management in Santa Fe, New Mexico, with around $43 billion in assets under management.

Why It Matters: In the face of a robust U.S. economy and a record-setting corporate debt issuance, the prospect of rate cuts is heightening activity in the bond market. The advice from financial institutions like Morgan Stanley and JPMorgan for investors to capitalize on U.S. Treasury notes has also spurred activity.

However, the impending Fed policy shift also raises concerns about whether demand for U.S. bonds can keep pace with supply increases. It remains to be seen if the anticipation of rate cuts will be enough to keep bond prices high and yields comfortable.

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