Positive developments for bond traders caught in the Fed’s waiting game

The Treasury Department is set to launch a series of buybacks targeting seasoned and harder-to-trade debt, offering support to bond traders waiting on Federal Reserve rate policy. This move, along with the Fed’s upcoming tapering of its balance-sheet unwind in June, is expected to stabilize the Treasury market, which has been volatile this year due to shifting expectations for rate cuts.

Jay Barry, co-head of US rates strategy at JPMorgan Chase & Co, believes the buybacks will be a good backstop, while the slowing of the Fed’s quantitative tightening will help allay concerns of a repeat of the 2019 crisis in overnight funding markets. Treasury yields have declined since May, with US bonds on track for a monthly gain of 1.4%.

US swaps contracts are now pricing in around 32 basis points of Fed rate cuts for 2024, reflecting market expectations for only one quarter-point rate reduction as a certainty. The US market will be closed on Memorial Day, but two days later, the buybacks will begin, aiming to improve trading liquidity by replacing older, less liquid securities with newer ones.

Market depth in the Treasury market has improved this year, but still remains below its decade-long average. The prospect of less quantitative tightening next month is also lending support, with the ICE BofA MOVE Index showing anticipated swings in Treasury yields at their lowest since February 2022.

Investors are cautiously optimistic, with some looking to early June data for further insights. Overall, the bond market is settling into ranges, and with reduced volatility, some see value in buying Treasuries at current rates. Bond buyers are adding duration, anticipating further support from the Fed and stable economic conditions.