Interest rate turnaround in sight? Investors are betting on Fed decisions!

In recent months, markets have become increasingly prepared for possible interest rate cuts by the US Federal Reserve (Fed). The reason for this is concerns about slower economic growth in the USA. Investors in US government bonds are betting on a reduction in interest rates, especially as inflation remains above the target of 2%. Experts at Morgan Stanley predict that the 10-year bond yield could potentially fall below 4%, currently at 4.28%, depending on the Fed's future interest rate policy.

Markets already appear to be expecting two quarter-point rate cuts this year, as well as a third cut next year to around 3.65%. A cut to 3.25% could push the 10-year bond yield below 4%. These developments come at the same time as there has been strong demand for government fixed income auctions, such as the recent seven-year bond auction, which yielded 4.194%.

Market reactions and current data

While the 10-year bond yield rose to 4.25% on Wednesday, the disinflation process has stalled. The Fed announced a one percentage point interest rate cut in July, a decision that followed weak labor market data. Recent surveys from the Federal Reserve Bank of Philadelphia show that nearly a third of U.S. workers fear for their jobs. At the same time, a decline in consumer confidence and a low Citigroup Economic Surprise Index indicate possible economic problems.

In a different context, recent information reports a rise in the 10-year US Treasury note that occurred on October 7, when the yield rose above 4% for the first time since August. This increase was driven by strong labor market data, which showed non-farm payrolls gained 254,000 jobs in September. This data led to considerations about the Fed's future interest rate policy, and while experts consider further major interest rate cuts to be unlikely, an increase in interest rates is also currently being discussed.

The probability of a Fed pause in rate cuts in November rose from 2.6% to 14%. While investors continue to expect rate cuts of 25 basis points each in November and December, the probability of a rate cut of 50 basis points has fallen. Critics, including economist Mohamed El-Erian, had already raised concerns that the Fed might not be able to cut rates further or might even be forced to raise rates.