The market continues to lower its expectations for future interest rate cuts; it's now pushing its expectations for rate cuts into the second half of 2007. This is one of the most important reasons
for
the decline in Treasury prices.
Only rarely have Treasury yields fallen
below the fed funds rate over the past 16 years -- and that only when an
interest
rate cut was no more than six months away. This means that the bond
market is
now crossing into territory that could push rate cut expectations too
far
out for some investors to feel comfortable owning Treasuries at yields
below
the funds rate, particularly those who are financing their fixed-income
holdings by borrowing money, typically around the fed funds rate.
Here are the numbers, as I reported in the Columnist Conversation
earlier:
The market is now priced for just 4% odds of a rate cut at the Jan.
31
FOMC meeting.
The market is priced for 12% odds of a cut at the March
21
FOMC meeting and about 35% odds of a cut at the May 9 FOMC meeting.
For
the June 28 FOMC meeting, the market is priced for about 50% odds of a
cut.
Eurodollar contracts indicate that the market fully expects at
least
one quarter-point rate cut for all of 2007, but the odds of a second are
now
only around 50%.
The market was once priced for small odds of four rate
cuts for all of 2007.
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Tony Crescenzi Blog New Data Could Hurt Stocks 12/28/2006 11:22 AM EST Data show trends that could spur weakness in the bond market, strong enough to drag down stocks.
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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