Fed to cuts rates again in November – heightened US election-related bond market volatility to be expected

Fed to cuts rates again in November – heightened US election-related bond market volatility to be expected

Comments by Michael Krautzberger , Global CIO Fixed Income at AllianzGI, ahead of the Fed meeting on 6 and 7 November 2024

Fed to cuts rates again in November – heightened US election-related bond market volatility to be expected

  • We expect the US Federal Reserve to cut rates by 25bp at its 7th November policy meeting, taking the target range for the Fed funds rate to 4.50-4.75%.
  • US economic data has generally surprised to the upside since the September policy meeting, while a rising probability of a Trump victory in the US Presidential election has also contributed to the recent bond sell off.
  • Monetary conditions have now taken out quite a lot of easing in recent weeks given the re-pricing in both front-end and long-end rates and given the stronger US dollar.
  • We believe that the Fed still wants to move towards a more neutral policy stance as its confidence grows on the inflation outlook. Interest rate markets are almost fully pricing a 25bp rate cut at the November meeting and pricing around a 60% probability of a further 25bp cut in December. We broadly agree with this pricing.
  • The outcome of the US election could be the biggest disruptor to market pricing of the Fed easing cycle in 2025; we expect further near-term volatility in bond markets as investors digest the policy implications of the election result.
  • We think the best way to express the current macro and policy backdrop in our portfolios is via US (and euro) yield curve steepeners, albeit we tactically reduced curve risk during September. We will also look for opportunities to add duration risk opportunistically on any further back up in US Treasury yields or add duration in other G10 bonds markets which have the shallowest interest rate cutting cycles already discounted in forward markets.

The Fed surprised market expectations in September, with a larger than expected 50bp rate cut to start its rate cutting cycle. The Fed signalled an important shift in its policy reaction function, with a renewed focus on the employment portion of its dual mandate. Although trends in the labour market data still present a broadly constructive backdrop for the US economic outlook, the Fed’s policy shift – towards pre-emptive, “insurance” rate cuts – suggests policymakers are alive to the risks of keeping policy restraint in place for too long, unnecessarily raising recession risks in 2025.

The Fed’s dot plot projections from the September meeting showed a median forecast of a further 50bp in cuts for the remainder of this year and a further 100bp in 2025. Forward interest rate markets have moved to broadly mirror this outcome, with a terminal rate in this cycle around 3.5%.

The Fed’s actions have for now at least raised the probability of a US soft landing in 2025, even though history tells us that this is a rare outcome.

US Treasury yields have responded to this favourable set-up for the growth outlook in 2025, with 10-year US Treasury yields rising by some 55bp since the Fed cut rates on 18th September.

However, any sharper than expected slowdown in the US economy in 2025 versus current expectations would leave room for the market to price more aggressive cuts and a lower terminal rate. We think there is scope for hard landing probabilities to rise – but this hinges on the extent of any labour market deterioration ahead.

In the short term, we prefer to be positioned for steeper yield curves in the US given that the easing cycle is now underway and long-end bonds still face the challenges of huge fiscal deficits and the potential uncertainties around inflation after the election.

We may look to opportunistically add duration risk on any further back up in bond yields, although we think yield volatility is likely to stay elevated over the near-term.


Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK). [AM: 3990290]


要查看或添加评论,请登录

Allianz Global Investors的更多文章

社区洞察

其他会员也浏览了