Prominent bond analyst Steven Major believes a Federal Reserve led by Kevin Warsh could implement significantly more interest rate cuts than the market currently anticipates. "If he weren't aligned with the rate-cutting camp, he wouldn't be considered for the position. The market is currently pricing in roughly two cuts, but we might witness four or five, not just two."
Steven Major, a well-known bond analyst, former Global Head of Fixed Income Research at HSBC Holdings PLC, and current Global Macro Advisor at broker Tradition Dubai, stated that the extent of rate cuts under a Fed chaired by Kevin Warsh could far exceed current market expectations.
Following former President Donald Trump's announcement last week of his intention to nominate Warsh for the Fed chairmanship, the market initially experienced some confusion regarding the potential impact on interest rates. Warsh, a former Fed policymaker known for his inflation concerns, was nominated by Trump, who has consistently advocated for substantial rate reductions.
Major said in a Bloomberg Television interview on Tuesday, "I think a fairly reasonable assumption is this: if he weren't part of the rate-cutting camp, he wouldn't be considered for the role. The market is currently pricing in about two cuts, but we could see four or five, rather than just two."
Money markets are currently pricing in an approximately 80% probability of a second rate cut materializing by 2026, with the market last week even entertaining the possibility of a third cut. This pricing reflects the market's perception of Warsh as more hawkish compared to other candidates previously considered by Trump. His nomination still requires confirmation by the Senate.
Major is not optimistic about curve-steepening trades.
In the bond market, U.S. Treasuries were largely stable on Tuesday, with the two-year yield at 3.58% and the 10-year yield at 4.29%.
Expectations for rate cuts, coupled with prospects of a potentially re-accelerating U.S. economy and resurgent inflation, have prompted investors to favor short-term bonds over long-term Treasuries, driving a steepening of the yield curve.
Major, the former Global Head of Fixed Income Research at HSBC Holdings PLC, who is known for his bullish stance on bonds, expressed skepticism towards curve-steepening strategies and recommended directly buying short-term U.S. government debt.
"If you are so convinced that front-end yields will fall and believe the curve will steepen, then just buy the market, go long," Major said.
"I'm less convinced about the steepener trade; I think a better trade is to go outright long the middle part of the curve."
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