-- Bond traders who struggled to predict how high the Federal Reserve would raise interest rates are finding the way down just as vexing.At TCW Group Inc., Jamie Patton, the co-head of global rates, is convinced that even the swift easing that’s now baked into financial markets doesn’t go far enough, leaving shorter-dated Treasuries plenty of room to keep rallying. “The Fed is going to have to lower rates faster and more aggressively than what the market’s priced in,” she said.
On Monday, Treasuries slipped, with yields rising as much as 5 basis points, after the Labor Department’s employment report last week underscored the uncertain outlook. Employers expanded payrolls at a slower-than-expected pace of 142,000 in August, capping the weakest three months of job growth since mid-2020. But the slowdown wasn’t sharp enough to tip the debate over how swiftly — or how deeply — the Fed is likely to ease policy in the months ahead.
“The Fed needs to cut, we all know that, but the question is the pace,” said John Madziyire, senior portfolio manager at Vanguard, which manages $9.7 trillion in assets. He said his firm has adopted a “tactical short bias” toward the bond market since the recent rally. The bank’s trajectory will depend on whether the Fed pulls the economy into a soft landing or is forced to shift into recession-fighting mode, as it did during the Wall Street credit crisis or after the Internet bubble’s collapse. Right now, economists are largely predicting that the economy will avoid a contraction, leaving stocks holding not far from record highs despite the recent slump.
But she thinks the market is poised for some disappointment. “The Fed will go slower rather than faster because the economy is not on the cusp of a recession,” she said, predicting the 10-year yield could rise back toward 4% from around 3.7% now. “Treasuries have moved a little bit too far, too fast.”Sept. 11: MBA mortgage applications; consumer price index; real average earningsFed calendar:Sept. 11: 17-week bills; 10-year note reopening--With assistance from Kristine Aquino and Ye Xie.
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