Traders in money markets are starting to bet the Federal Reserve may be forced into an emergency interest-rate cut if the coronavirus gets much worse.
The wagers are driving down benchmark yields in U.S. Treasuries to record lows. Traders are now pricing more than a full 25-basis-point cut for the Fed in March, with another one expected in June. The last time the Fed cut out of its schedule was in 2008.
“An emergency cut is clearly a growing possibility for a number of reasons — from the hit to sentiment, to the lower oil price, moves in equity markets, risks to the global supply chain etc.,” said John Wraith, a rates strategist at UBS Group AG in London. “Unlike most other central banks, they have some room for manoeuvre.”
Bets on policy action follow a week of market turmoil in the face of the coronavirus spreading globally to near pandemic proportions. Investors are worried that a slowdown in China — and now other parts of the world as factories are closed — will weigh on growth.
While traders expect the Fed could end up cutting rates at least three times this year, they are also pricing in more than 25 basis points of easing by the Bank of England in May and over 10 basis points by the European Central Bank in July. Instead of an emergency cut, the Fed could also choose to cut by 50 basis points at its March 18 announcement, according to Standard Chartered Plc.
“Now it’s very much in ‘where’s next’ mode,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Plc. “Is the market sensible to be pricing in some possibility of such an emergency cut — well, yes.”/Investing.com