Some Wall Street banks say rate hikes are exaggerated, so buy bonds

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Some Wall Street banks think that bond market traders may have gone too far in their frenzied speculations about the pace of future Federal Reserve rate hikes. Investors have been pushing US government debt yields and bond prices lower, to start the year with expectations that the accelerated economic recovery from the pandemic could prompt the Fed to exit. of its accommodative policies sooner than the central bank has signaled.

But analysts at Barclays BARC, + 0.86% and TD Securities TD, -0.55% say that traders who bet on the rate hike may have overlooked. “The market price of the rally cycle is too aggressive in light of the new Fed framework,” Barclays strategists wrote on Monday. “The road to full employment is still long and inflation is unlikely to remain at projected levels for long.” Strategists at TD Securities now expect a rate hike in September 2024, and the Fed is likely to begin tightening its loose monetary stance by reducing its $ 120 billion-a-month asset purchase program before contemplating rate hikes, a process that will probably take about a year. . His cautious stance comes despite a stronger-than-expected employment report that showed the US economy in March added another 916,000 jobs. See: IMF backs Fed slowdown Analysts skeptical of bearish bond market trading said that while improved employment figures last month underscored a fast-paced recovery, the moderate policy stance of the US is unlikely to change. Fed alone. With the central bank setting two key requirements for take-off (full employment and sustained inflation above 2%), the bar for an accelerated schedule of rate hikes remains high. To take advantage of soaring market prices, Barclays recommended investors to buy TMUBMUSD05Y 5-year Treasury notes, 0.872%, seen as the most sensitive maturity to expectations of rate increases in the coming years. The 5-year note was trading at 0.86% on Tuesday, after rising to a 13-month high of 0.98% on Monday. At the beginning of the year, the intermediate maturity was close to 0.36%. Bond prices move inversely to yields. The 10-year Treasury note TMUBMUSD05Y, 0.872% also fell from its recent highs, trading at 1.66% at the last check. Read: ‘Investors still don’t understand the Fed,’ says this chief investment strategist Market participants now expect on average four rate increases of a quarter of a percentage point by the end of 2023 from the current range of 0% to 0.25%, and about a single such hike before the end of next year. The aggressive expectations of the market have contrasted with the long calendar of the central bank itself. Interest rate projections from senior Fed officials tracked via the so-called “dot plot” show that most employees still expect the central bank’s federal funds benchmark rate to remain at lows. through 2023. Related: Powell Says Fed Will ‘Gradually’ Trim Its Bond Market Footprint – Some Think This Year