As we get closer to the #FOMC July meeting where it’s expected to announce another #ratehike of 75 bps, the market seems to be discounting that the hiking cycle will be over 9 months from now. Fed fund futures are pointing towards a rate reduction of 60 bps between April ‘23 and April ‘24. We can speculate about the reasoning behind this bet: investor might be picturing a scenario were the economy falls into recession and that causes inflation to decrease which allows the fed to stop hiking. Maybe the equity market deteriorates just enough for the fed to reverse course, or maybe due to tight conditions, the labor market starts to crack (the other fed mandate). The important practical corollary of this positioning is that the volatility of the 2 year treasury, the epitome of safety, is 3X higher than its average of the last 5 years. It’s getting increasingly difficult to derisk a portfolio.
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Source: Daily shot.
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