Market Anticipation Builds Ahead of Federal Reserve Decision
As the Federal Reserve prepares to announce its interest-rate decision, US Treasuries are gaining traction, driven by bullish bets that Chair Jerome Powell will hint at a potential rate cut in March. With inflation remaining sticky, traders are eagerly awaiting Powell’s afternoon press conference for clues on the outlook for policy.
Yields Slip as Market Awaits Powell’s Remarks
Yields across the curve slipped by around one basis point on Wednesday, as the market anxiously awaited Powell’s comments. The US central bank is widely expected to keep rates steady this week, but swaps are pricing in a roughly 30% chance of a cut in March. Traders have a lot riding on Powell’s remarks, with expectations for further easing climbing sharply at the start of the week during a tech-driven rout in stocks.
Accommodative Bias Favors Treasuries
“The Fed has shown an accommodative bias,” noted Kevin Thozet, a member of the investment committee at Carmignac, who favors US Treasuries over European sovereigns. “The most recent inflation publication was quite benign, not to mention the potential deflationary impact of the latest AI developments.” This accommodative stance has led to a surge in wagers on Treasuries gains, with JPMorgan Chase & Co.’s latest client survey showing the biggest net long position in US government debt in almost 15 years.
Hedging for a Possible March Rate Cut
Hedging for a possible March rate cut makes sense, given December’s cooler-than-expected inflation print and Fed Governor Christopher Waller’s comment that easing by mid-year is possible. However, the big question mark remains President Donald Trump’s tariff plans and their impact on the economy. Citigroup Inc. rates strategist Edward Acton noted that the lack of clarity around the levies might see Powell hesitate at taking a March meeting cut off the table for the sake of optionality.
Open Interest in Futures on the Rise
In another sign that long positions are building in Treasuries, open interest in futures is increasing in 10-year note contracts, particularly following Monday’s bond rally. A standout trade in recent sessions has also targeted a bigger bond rally, with profits getting a boost from Monday’s surge in haven assets.
Positioning Indicators Across the Rates Market
A rundown of the latest positioning indicators across the rates market shows that JPMorgan clients’ net long positioning rose to the biggest since October 2010. Outright longs rose on the week by six percentage points to the highest since November 2023, while short positions were unchanged. The premium on hedging in Treasuries has flipped to favor calls over puts for the first time since the end of last year, with the brunt of the shift occurring during Monday’s sharp flight-to-quality move.
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