Bond Traders Bail on the Fed Too Soon

Bond traders are ready to pick a fight with the Federal Reserve. Maybe too ready.

By just about any measure, they’ve begun to price out rate hikes in 2019 and beyond, betting in part that a stock-market rout that sent the S&P 500 toward a correction would cause central bankers to quit tightening policy. The eurodollar futures market at one point on Friday only expected about 1.5 moves next year, after baking in two increases just days earlier. Meanwhile, the Treasury yield curve from 5 to 30 years reached the widest since April, exhibiting a rare case of “bull steepening,” which is to say that shorter-term yields fell more than those at the long end. That’s because traders were altering their outlook for how high the fed funds rate may climb in the coming years. The five-year yield closed the week below 3 percent for the first time since September. Fed officials forecast their benchmark short-term rate will be above that from late 2019 through at least 2021.