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Bond investors, worried about persistently sticky inflation, have reduced their exposure to longer-dated U.S. Treasuries ahead of the Federal Reserve's two-day policy meeting this week, at which it will likely hold steady. interest rates.
The U.S. central bank's policy-setting Federal Open Market Committee on Wednesday is widely expected to keep its benchmark overnight interest rate in the 5.25%-5.50% range for the seventh consecutive meeting. . In his post-meeting news conference, Fed Chair Jerome Powell is expected to continue emphasizing a trend toward easing, although he is likely to show little urgency in cutting rates in the near term given lingering concerns. inflationary pressures and a still solid labor market.
The US interest rate futures market has lowered expectations for monetary policy easing this year and is now pricing in a 25 basis point rate cut in 2024, most likely in November or December, according to calculations by LSEG.
Investors will also focus on the Federal Reserve's updated quarterly economic projections, including interest rate forecasts, known as the "dot plot." The latest dot plot from March pointed to three rate cuts in 2024. Market participants expect it to come down to two cuts or one.
"We are underweight the longer end of the (Treasury) curve, particularly the 20- to 30-year maturities before the Fed meeting," said Noah Wise, senior portfolio manager on the Income Plus team. of Allspring Global Investments, with assets under management of $570 billion.
โThat's where we see more risk because inflation is structurally higher. The services side of the economy continues to outperform the goods side. And what we have seen in our analysis indicates that those price changes tend to be more rigid.โ
Higher growth and inflation expectations typically trigger a sell-off at the long end of the curve, pushing up those yields.
Inflation overall has moderated but remains above the Federal Reserve's 2% target. The personal consumption expenditures (PCE) price index, the Federal Reserve's preferred measure of inflation, rose 2.7% in April year-over-year, while the consumer price index (CPI) posted a 3.3% year-over-year increase. .4% in April.
May CPI data will be released on Wednesday.
Wage inflation also rose last month. Average hourly wages rose 0.4%, while wages rose 4.1% in the 12 months to May. Annual wage growth in the range of 3.0%-3.5% is considered consistent with the Federal Reserve's 2% inflation target.
Boris Kovacevic, global macro strategist at global payments company Convera, said there are signs that price pressures could remain elevated as goods inflation has started to recover with rising commodity prices. .
TAKING LONG BETS OFF
Ahead of this week's Federal Reserve meeting, bond investors had been reducing their net long positions in longer-maturity Treasuries in the futures market.
Data from the Commodity Futures Trading Commission showed money managers reduced net long positions in 10-year U.S. note futures last week to 1,214,934 contracts, the lowest level in about two months. Net long positions on this maturity have been falling since the first week of May.
They also reduced net long positions in ultra-long US bond futures to 724,972, the lowest in a month and a half. Its net long positions have been declining since May 14.
โThe challenge for anyone trying to invest in these markets is that, with the shape of the yield curve as it is, any long duration position has negative carry in the sense that cash (money market funds) rates are above 5%, while bond yields are below 5%,โ said Brendan Murphy, head of North American fixed income at Insight Investment, which oversees $825.3 billion in assets.
"So every time you extend your duration, you're essentially giving up some performance to do it."
Extending duration means buying more long-term assets.
Instead, fixed income investors have generally been long the shorter end, particularly 2- and 5-year US Treasuries, or the so-called belly of the curve, the sectors that are likely to outperform the long stretch when the Federal Reserve cuts. rates.
Institutional investors increased their net long positions in US 2-year bond futures in the week ended June 4, the data showed. Those net long positions have increased for two consecutive weeks.
Asset managers have also been net long US 5-year bond futures, hitting a record high in late May before tapering off a bit last week.
โInvestors believe that the leading end of the curve has peaked and that the Federal Reserve will not need to raise interest rates again. That should keep the front end relatively stable,โ said Chip Hughey, managing director of fixed income at Truist Advisory Services.
Source: Reuters (Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Paul Simao)
