Market Shifts to Betting on One More Rate Cut This Year, Then Halt in 2024

The unexpected rise in inflation and the renewed weakness in the labor market cast a shadow over the prospects of the Federal Reserve's interest rate cuts.

Data released in the United States last week showed that the CPI in September rose by 2.4% year-on-year, exceeding the expected value of 2.3%; the core CPI in September rose by 3.3% year-on-year, also exceeding the expected value of 3.2%. At the same time, the number of initial jobless claims for the week last week unexpectedly rose from 225,000 to 258,000, indicating a renewed weakness in the labor market.

This further increases the uncertainty of the Federal Reserve's interest rate cut prospects. After the release of the two data, the yield on 10-year U.S. Treasury bonds once rose to the highest level since July, and the Move index, which tracks the expected yield volatility of U.S. Treasury bonds compiled by Bank of America, has also soared to the highest point since January.

Bond market traders have also reduced their bets on interest rate cuts. Traders are now betting that the Federal Reserve will only cut interest rates by 45 basis points in the remaining two FOMC meetings this year, while a 50 basis point cut was considered "a foregone conclusion" before the release of the September non-farm report.

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At the same time, the options market is betting that there will only be one interest rate cut left this year, and it may even pause interest rate cuts after a 25 basis point cut this year until early next year.

Some analysts pointed out that fluctuations in the U.S. Treasury bond market may continue for several weeks before the U.S. Treasury's quarterly financing announcement, the October non-farm report, and the Federal Reserve's November interest rate decision are released.

Citadel warned its clients to be prepared for "major fluctuations" in the bond market in the future.

David Rogal, portfolio manager of BlackRock's fixed income department, said:

"As the election begins to be factored into the option value window, the implied volatility of (U.S. Treasury bond yields) may be higher."

Media reports say that top asset management companies, including BlackRock, Pacific Asset Management, and UBS, currently advocate investing in the relatively safer 5-year U.S. Treasury bonds.Anmol Sinha, Chief Investment Officer of Capital Group, which manages $91.4 billion in bond funds, stated:

"The shorter end of the yield curve (five years or less) currently seems more attractive to us."

As of press time, the yield on the 10-year U.S. Treasury has risen above 4.1%, reporting at 4.102%.