After Powell comments, traders see just one rate hike next year

After Powell’s comments, BMO U.S. rates strategist Jon Hill said, the futures market went from pricing in 1.6 hikes next year, to just above one full rate hike and a 25 percent probability of a second one. It’s still pricing in a full December rate hike.

The Fed is expected to raise rates by a quarter point at its meeting Dec. 19, and has forecast three more hikes for next year.

“If there’s only one hike priced in for all of 2019 and they hike in December, then things have to get really great for them to hike more than once because the market is now almost guiding them in a way,” said George Goncalves, head of fixed income strategy at Nomura.

Goncalves said there’s a level of skepticism in the bond market’s reaction. For instance, while the 2-year yield fell, the 30-year bond yield rose, and it was at 3.33 percent. Bond prices move opposite yield.

“There’s some concern that what if the Fed makes a policy mistake and stops too soon,” said Goncalves. He said the move may also be an unwind of a trade that flattened the yield curve, or where traders bought long end securities, like the 10- and 30-year, and sold the short end or 2-year because of Fed rate hikes. That so-called ‘flattener’ was viewed as a signal of possible economic trouble on the horizon that could eventually lead to an inverted curve, and a recession.

“You have these entrenched trades based purely on Fed hiking, and now that’s being questioned. How far are they going to go? And the month end is in a few days so you could have positioning money coming out of bonds and going into equities,” he said.

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