Bond Traders Need to Price In Risk of Future Fed Hikes, Citigroup Says
- Derivatives are more in line with Fed signals on easing path
- There’s a risk of a 1998-style, brief easing cycle, Citi says
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Bond traders have come more in line with the Federal Reserve’s trajectory for the upcoming easing cycle. Strategists at Citigroup Inc. say what’s missing now is traders hedging the risk of a very brief easing cycle followed by rate increases shortly thereafter.
Citigroup, whose economists expect the Fed’s first rate cut in June, sees some potential for the next few years to mirror what happened in the late 1990s. In 1998, the US central bank cut rates three times in rapid-fire succession to short-circuit a financial crisis brought on by the Russian debt default and the near-collapse of hedge fund Long Term Capital Management. The Fed then began a cycle of rate increases in June 1999 to contain inflationary pressures.