The Betting on Wall Street That Fed Rate Hikes Are Winding Down

Two-year Treasuries are the new talk of the town on Wall Street as sentiment grows that Fed may finish hiking interest rates.

BlackRock’s Jeffrey Rosenberg called the yields a “screaming buy,” according to Bloomberg, after the Department of Labor released higher-than-expected unemployment numbers Friday, a sign that the hot labor market is chilling.

The unemployment rate rose to 3.8% in August, up from 3.5% in July. However, U.S. employers added 187,000 jobs last month, more than economists expected.

Two-year Treasuries are sensitive to policy and could benefit from new approaches by the Fed. They also have high yields, which makes them particularly attractive as opposed to long-term bonds, which face macroeconomic uncertainty, Rosenberg, a senior portfolio manager in BlackRock's Systemic Fixed Income unit said. 

Two-year yields are sitting at 4.88% as of Monday, after a more than 20 basis-point fall last week.

George Goncalves, U.S. macro strategy chief at Mitsubishi UFJ Financial Group, told Bloomberg the recent numbers look like the “the beginning of the end of the robust job market and the countdown for how long can the Fed stay on hold.”

Michael Cudzil, portfolio manager at Pacific Investment Management Co., agrees with Goncalvez: the employment report leaves “the bond market comfortable with the view that the Fed is on hold for now and may be done for the cycle,” Cudzil told Bloomberg. “If they are done for the hiking cycle, it’s then about looking at the first cut that leads to steeper curves.”

And interest-rate swap traders expect a less than 50% chance that the Fed will raise interest rates again by November, Bloomberg reported. What’s more, analysts are expecting rate cuts by mid-2024.

“It is about restrictive policy for longer, not higher for longer,” Rosenberg said on Bloomberg TV. “That is what the bond market has priced in for next year. A gradual decline in inflation, leaving the Fed to have to cut rates, not because it is a hard landing or because they are overly tight but because it is avoiding becoming overly tight to maintain restrictiveness.”

The central bank has raised rates 11 times since March 2022, to a 22-year high of 5.25% to 5.5%. Despite optimism from analysts, Fed Chair Jerome Powell said on Aug. 25 the bank could raise rates again to wrangle inflation down to its 2% target. The year-over-year inflation rate in July was 3.2%.

“We are prepared to raise rates further if appropriate," Powell said. “and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”