Fed’s Higher-for-Longer Mantra Has Doubters in Bond Market

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(Bloomberg) -- Amid signs the bond market has bought into the Federal Reserve keeping interest rates higher for longer, a cohort of investors is placing bets on the economy hitting a wall — and a sharp policy reversal in short order.Most Read from BloombergUltra-Rich Buy Ultra-Luxury Counseling to Get Kids Into HarvardMGM Resorts Hackers Broke In After Tricking IT Service DeskDisney Talks on ABC Sale Heat Up as Byron Allen Makes OfferCanada Postpones Trade Mission to India With Tensions On RiseA

Treasury yields have settled into tight ranges this month near the highest levels in more than a decade as data show a resilient economy and inflation still well above the Fed’s 2% target. But with yields anticipating a peak in the policy rate, the outlook for growth takes on greater importance.

The Fed is widely expected to leave its policy rate unchanged next week after lifting it in July for the 10th time in an aggressive hiking cycle that began in March last year. It’s also seen significantly raising its forecast for growth and indicating another rate increase this year in its so-called dot plot. The rate outlook for 2024 remains up for debate. In June, the median projection showed a full percentage point cut by the end of next year.

One trade positioned for a 3% rate by the middle of next year versus a current market level around 5%. The premium paid on that bet was in excess of $10 million. Other similar trades surrounding March were also made over the course of the week. Positioning through options for next year’s Fed meetings in March and June may make sense, given the bond market faces the likelihood of being stuck in a holding pattern as investors wait for clarity on the economy.

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