Hedge fund moves at short end of U.S. curve show Fed cuts not too far away: McGeever

LONDON (Reuters) – The Federal Reserve will raise interest rates later this week and probably again early next year, but that will be the end of tightening cycle and it won’t be long before rate cuts are on the table.

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo

That’s the message being sent out by the latest twists to hedge fund positioning at the short end of the U.S. Treasury curve: speculators now hold a record short position in two-year futures, while bullish momentum in five-year bonds is the strongest in over a decade.

(For a graphic on ‘CFTC 2y positions’ click tmsnrt.rs/2S8gVjO)

(For a graphic on ‘CFTC 5y position changes – momentum’ click tmsnrt.rs/2S48GVR)

The five-year yield fell below the two-year yield earlier this month for the first time since mid-2007, an inversion at the short end that many analysts reckon will be replicated in the more closely watched 2s/10s part of the curve soon enough.

The Fed is expected to raise rates for the ninth time this cycle on Wednesday, although money market traders aren’t as sure as they were a few weeks ago, ascribing only a 73 percent probability to an increase.

One more hike next year is no longer fully discounted by money markets, as the economic cycle comes closer to rolling over. But the Fed itself still reckons three might be warranted, and the consensus view of economists in a Reuters poll last week was that the Fed would raise twice next year.

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