“Mid-cycle adjustment in policy.” Those words from Fed Chair Jerome Powell have devastated one of the bond-market’s most popular trades.
In one fell swoop, Federal Reserve Chairman Jerome Powell dealt a sharp blow to one of the bond-market’s most popular trades at the Fed’s post-meeting press conference after the U.S. central bank cut interest rates by 25 basis points on Wednesday.
But Powell’s remarks suggesting the Fed’s cut in July would be more of an insurance move against an economic slowdown led the yield curve to flatten instead. His comments came as a surprise to the crowd of Wall Street investors and traders who had hoped for the Fed to deliver on the market’s dovish expectations.
Recently, strategists at Bank of America Merrill Lynch, Deutsche Bank and BMO Capital Markets have all favored yield-curve steepening trades that simultaneously buy short-term Treasurys and sell longer-term debt.
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