NEW YORK- Bond investors, worried about persistently sticky inflation, have reduced their exposure to longer-dated US Treasuries ahead of the Federal Reserve’s two-day monetary policy meeting this week in which it is likely to hold interest rates steady.
The US central bank’s policy-setting Federal Open Market Committee is widely expected on Wednesday to keep its benchmark overnight interest rate in the 5.25 percent -5.50 percent range for a seventh consecutive meeting. In his press conference after the end of the meeting, Fed Chair Jerome Powell is expected to continue emphasizing an easing bias, although he is likely to show little urgency to cut rates in the near term given persistent inflationary pressures and a still robust labor market.
The US rate futures market has scaled back expectations for policy easing this year and is now pricing in one 25 basis-point rate cut in 2024, most likely in November or December, according to LSEG calculations.
Investors will also focus on the Fed’s updated quarterly economic projections, including interest rate forecasts, referred to as the “dot plot.” The last dot plot in March pointed to three rate cuts in 2024. Market participants expect that to be whittled down to two cuts or one.
“We are underweight the longer end of the (Treasuries) curve, in particular 20- to 30-year maturities ahead of the Fed meeting,” said Noah Wise, senior portfolio manager for the Plus Fixed Income team at Allspring Global Investments, with assets under management of $570 billion.
“That’s where we see more of the risk because inflation is structurally higher. The services side of the economy continues to run hotter than the goods side. And what we’ve seen in our analysis indicates that those price changes tend to be stickier.”
Higher growth and inflation expectations typically prompt a sell-off on the long end of the curve, pushing those yields higher.
Inflation overall has moderated but remains above the Fed’s 2 percent target. The personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, rose 2.7 percent in April on a year-on-year basis, while the consumer price index (CPI) posted an annual rise of 3.4 percent in April.
CPI data for May is due to be released on Wednesday.
