2-year U.S. bond yields fell sharply More substantial rate cuts remain in doubt
Markets have now fully digested the expectation of a 25 basis point rate cut from the Fed this week, when the Fed is expected to begin its rate-cutting cycle, and the possibility of whether it will do so in a more drastic manner is seen as a coin toss. If officials ultimately opt for a more modest 25 basis point rate cut, all the enthusiasm for a rate cut will risk big losses for traders. Despite the fact that the Fed is set to hold its most uncertain meeting since 2007, futures traders are betting on a record number of significant rate cuts. “The Fed is going to have to strike some kind of balance on this because their internal views on rate cuts are rate cuts are priced differently than the market.” Yields on the policy-sensitive 2-year Treasury note fell sharply from nearly 5% at the end of April to near 3.5% this week, a low since September 2022, as calls for a rate cut intensified against a backdrop of easing price pressures and signs of weakness in the labor market.
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