Rather than wait for conclusive economic evidence that this year’s frenetic monetary tightening will deliver recessionary conditions in 2023, investors have been buying bonds – a stance advocated by Pacific Investment Management Co., among others.
The bond market is zeroing in on a US recession next year, with traders betting that the longer-term trajectory for interest rates will be down even as the Federal Reserve is still busy raising its policy rate.
Long-dated Treasury yields are already below the Fed’s overnight benchmark range – currently 3.75% to 4% – and there’s still an extra percentage point of central bank increases priced in for the coming months. Activity has also emerged in the options market that suggests some are hedging against the risk that policy rates could eventually halve from their current level.
