LIVE MARKETS-With Fed rate cuts priced in, investors should consider Treasury hedges

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WITH FED RATE CUTS PRICED IN, INVESTORS SHOULD CONSIDER TREASURY HEDGES

Investors should consider hedging some long Treasury positions with Federal Reserve rate cut expectations well priced into the market and some Fed officials cautioning that the U.S. central bank may not have much room for further easing, according to BCA Research.

St. Louis Fed President Alberto Musalem on Monday said he supported the quarter-point cut last week as a "precautionary move," but added that the policy rate accounting for inflation may already be close to neutral.

Atlanta Fed President Raphael Bostic also said the rate cut approved at last week's meeting may be the only one needed this year, with risks tilted towards persistently higher inflation and a related risk of rising inflation expectations. Cleveland Fed president Beth Hammack said she felt policy at this point was not that restrictive.

The comments came as new Fed Governor Stephen Miran said that the Fed is misreading how tight it has set monetary policy and will put the job market at risk without aggressive rate cuts.

Felix-Antoine Vezina-Poirier, strategist at BCA Research, said Monday’s comments highlight risks to market pricing for rate cuts. BCA recommends investors maintain long duration exposure and trades that would benefit from further steepening in the yield curve on a 6-12 month time horizon. This is based on the view that the labor market will continue to weaken.

But with easing well priced into the market, BCA is also tactically hedging the position with a curve flattener using January 2026 and December 2026 fed funds futures.

Traders are pricing in 50 basis points of additional cuts this year after the Fed last week cut rates for the first time since December and indicated more cuts to come.

Fed Chair Jerome Powell will speak later on Tuesday. Chicago Fed President Austan Goolsbee said Tuesday if inflation cools off the central bank has some space to cut its interest rate target. Fed Vice Chair for Supervision Michelle Bowman also said that the Fed may be late in supporting the labor market and could need to speed the pace of rate cuts if demand weakens and businesses begin to lay off workers.

(Karen Brettell)

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