The expectations that the Fed will signal plans for an eventual slowdown have been supported by growing concern that the already tight financial conditions will set off a recession. That was highlighted this week when the 10-year Treasury yield dropped the most below the 3-month since March 2020.
That move was driven by investors increasing their holdings of longer-dated debt on expectations that growth will slow so much that the Fed will start cutting rates next year. The most recent SMRA portfolio survey showed investors returned to net long territory at 100.1% for the first time since 2021, while a JPMorgan Chase & Co. survey of Treasury clients was back to showing a net long holding at its highest point in two years.
“The bond market is telling you that the Fed is nearing its end game and duration is catching a bid as data points to a slowing economy next year,” said Arvind Narayanan, senior portfolio manager at Vanguard Group Inc. “The balance is between how much inflation falls relative to lower growth. If inflation is sticky relative to growth, the economy tips into recession and that will see Treasuries rally and being long duration will work for investors.”
This article was provided by Bloomberg News.