US interest-rate strategists at Goldman Sachs Group Inc. joined those at Barclays Plc in advising customers the Federal Reserve will be less aggressive in cutting interest rates this year than markets are predicting.
Swap contracts that reference Fed meeting dates are currently priced for a policy rate about 70 basis points lower than the current one by year-end. Goldman strategists led by Praveen Korapaty recommended paying the December rate, anticipating it will rise.
When the US central bank has made a series of rate hikes followed by two decisions to make no change, the most common subsequent course over the next six months “has been an on-hold Fed,” the strategists wrote in a report. The observations “argue against the extent of easing currently priced for this year,” they said.
Barclays strategists last week advised clients to fade the aggressive pricing of rate cuts for this year by recommending a short position in August 2023 fed funds futures at 95.06. The trade was around 6 basis points in the money Tuesday.
The latest futures positioning data from the Commodity Futures Trading Commission suggests hedge funds expect the Fed to keep rates higher for longer. They increased their aggregate short into Wednesday’s Fed meeting to the biggest on record. Meanwhile, a notable theme in options last week was to fade the amount of rate cuts priced into SOFR futures.
The rate-sensitive Treasury two-year yield rose nine basis points on Monday after the Fed’s senior loan officer survey signaled the credit market was only tightening slightly. Positioning around policy pricing for this year has entered a key period this week, with April inflation data due to be released Wednesday and Thursday.
By Edward Bolingbroke / Bloomberg
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