(Bloomberg) -- US Treasuries held onto recent gains ahead of the Federal Reserve’s interest-rate decision as traders ratcheted up bullish bets in hope that Chair Jerome Powell will signal a cut in March is firmly on the table.
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Yields were little changed across the curve on Wednesday, with two-year rates hovering around the lowest level in more than a month, as the market awaited Powell’s afternoon press conference for clues on the outlook for policy. The US central bank is overwhelmingly expected to keep rates steady this week, though swaps are pricing in a roughly 30% chance of a cut in March.
Traders have a lot riding on Powell’s remarks. Expectations for further easing climbed to start this week during a tech-driven rout in stocks and the risk-off vibe produced a wave of wagers on Treasuries gains. JPMorgan Chase & Co.’s latest client survey released Tuesday shows the biggest net long position in US government debt in almost 15 years.
“The Fed has shown an accommodative bias,” said Kevin Thozet, a member of the investment committee at Carmignac, who favors US Treasuries over European sovereigns. “The most recent inflation publication was quite benign, not to mention the potential deflationary impact of the latest AI developments.”
Hedging for a possible March rate cut makes sense after December’s cooler-than-expected inflation print and Fed Governor Christopher Waller’s comment that easing by mid-year is possible. The big question mark, of course, remains President Donald Trump’s tariff plans and their impact on the economy.
Given the lack of clarity around the levies, “this might see Powell hesitate at taking a March meeting cut off the table for the sake of optionality,” despite what appears to be a stable labor market, Citigroup Inc. rates strategist Edward Acton said in a note.
In another sign that long positions are building in Treasuries, open interest in futures — or the amount of new risk held by traders — is increasing in 10-year note contracts, particularly following Monday’s bond rally. In options, a standout trade in recent sessions has also targeted a bigger bond rally. Profits on the position got a boost from Monday’s surge in haven assets.
Morgan Stanley sees Wednesday’s meeting as a catalyst for another leg lower in Treasury yields, with strategists led by Matthew Hornbach recommending investors stay long the 5-year and position for a March cut.