Investors raise bets on Fed making two rate cuts

Investors have increased bets that the Federal Reserve will cut US interest rates not once but twice this year, to counter concerns about slowing global economic growth that have been inflamed by the worsening US-China trade war.

The probability that the central bank will cut rates two or more times by the end of 2019 rose above 40 per cent on Tuesday, according to futures prices, exceeding for the first time expectations of a single cut.

The markets have been signaling a single rate cut this year for several months, even while the Fed has been keeping official policy on pause and maintained that its next move could be in either direction.

Concerns over the growth outlook have been roiling the bond market, helping push the US government’s borrowing costs lower as investors sought out the relative safety of Treasuries.

The benchmark 10-year Treasury yield, for example which moves inversely to price, fell as much as 6 basis points on Tuesday to 2.26 per cent, marking its lowest level since September 2017. The signal from the widely-watched US yield curve, whose inversion has been a reliable indicator of past recessions, also intensified investor nervousness last Tuesday, because long-dated Treasury yields slid further below yields on shorter-dated government debt.

The difference between three-month and 10-year Treasury yields dropped as low as minus-9 basis points, nearing the year to date low of minus-11 bps. This measure of the yield curve has turned negative before every US recession of the past 50 years.

The Fed has avoided any indication that cuts are coming. Minutes of its most recent meeting, held on April 30 and May 1 before the latest round of tit-for-tat tariffs were announced, suggested that there was no immediate plan to move interest rates either higher or lower.

Speeches from policymakers in recent weeks have similarly reiterated the central bank’s “patient” approach. In spite of the Fed’s stance, investors’ are anticipating that the central bank will have to ease its monetary policy.