Bond Traders Expect Much Deeper Interest Rate Cuts Than Projected

Bond traders predict that the Federal Reserve‘s interest-rate cuts will go well beyond what the agency has forecast for the next nine months.

Traders in the U.S. rates options market expect a much higher 3 percentage points worth of cuts by March. This dwarfs the Fed’s recent projections of just 25 basis points of reductions by the end of 2024 and a total 125-basis-point cut by the end of next year, Bloomberg reported.

Options-market activity related to the secured overnight financing rate over the past three sessions show a significant upside if the Fed reduced its key rate by 300 basis points to 2.25% by next year’s first quarter.

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This scenario would allow traders to hedge other investments, but it is an unlikely outcome unless the U.S. economy plummets into recession.

Investors have been keeping a close eye on economic data and remarks by Fed officials for any clues on the timing of eventual Fed easing while hedging against extreme rate cuts and other tail-risk outcomes.

Price Action:  iShares Core U.S. Aggregate Bond ETF AGG slipped 0.36% by early-afternoon trading on Wednesday, while Vanguard Total Bond Market ETF BND declined 0.40%. Vanguard Total International Bond ETF (BNDX) slid 0.43%.

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