Credit Insights

Bond Markets Rally as Investors Price In Monetary Easing

Dave Sekera, CFA

Fixed-income markets rallied across the board last week as investors bid up the prices for global sovereign bonds. The confluence of slowing economic growth, ongoing trade negotiations, and weakening employment led investors to price in a significantly higher probability that the U.S. Federal Reserve will begin to ease monetary policy in the near term. According to the CME FedWatch Tool, the probability that the Fed will lower the federal-funds rate in June rose to 25% and the probability of a rate cut in conjunction with the July meeting rose to 87%. Even after an expected rate cut this summer, investors don't think the Fed will stop at just one. The probability that the Fed will cut rates at least three times by the end of 2019 is slightly over 50%.

Economic growth has been slowing over the past few months. Based on current economic indicators, the Atlanta Federal Reserve Bank's GDPNow model estimate for the seasonally adjusted annual rate of real GDP growth in the second quarter dropped to 1.4%. The reading had been as high as 1.7% as recently as the beginning of May. With the economy softening, companies have been reducing the rate of hiring, and the employment report for May dropped to 75,000, the weakest reading since mid-2009.