Gertrude Chavez-Dreyfuss
5 min read
NEW YORK (Reuters) -Bond investors, anticipating the Federal Reserve will hold interest rates steady again this week, are moving away from longer-dated Treasuries as they temper expectations for an aggressive easing given the lower chance of a U.S. recession.
Their flight away from the long end of the curve also reflects worries about President Donald Trump's tax and spending bill, which is being considered by the U.S. Senate.
On Wednesday, the U.S. central bank's policy-setting Federal Open Market Committee is widely expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range at the end of a two-day meeting, as it tries to grapple with a mercurial Trump administration trade policy that could still boost inflation in the second half of the year.
But soft consumer and producer price readings in May, which so far have yet to show the effects of higher tariffs on inflation, have fanned expectations that the Fed could resume cutting rates soon.
Futures tracking the Fed's policy rate show higher odds that the central bank will deliver a pair of back-to-back rate cuts starting in September. Before the release of the latest inflation numbers, the market had priced in a cut in September followed by another one in December.
The Fed reduced rates three times in 2024 before pausing its easing cycle early this year.
"I don't necessarily want to go long duration," said Victoria Fernandez, chief market strategist and fixed income portfolio manager at Crossmark Global Investments in Houston.
While traders are betting the Fed's next rate cut will happen at its July or September meetings, Fernandez said she could see it happening "toward the very end of the year or even into next year."
Duration, expressed in number of years, shows how far the bond's value will fall or rise when interest rates move. In general, when rates fall, higher-duration bonds experience a greater increase in value compared to those with lower duration.
Long-duration bets typically involve buying assets on the back end of the curve on expectations of a decline in yields.
"There's a reason long rates (30-year Treasuries) are moving toward 5%, and that is because there's significant pressure in selling duration," said Neil Aggarwal, head of securitized products and portfolio manager at Reams Asset Management in Indianapolis.
"There are near-term concerns about volatility and from a short-term basis if you expect volatility to persist, it's difficult being long duration."
