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  • Writer's pictureShernel Thielman

Traders Anticipate Global Monetary Easing as Rates Signal a Shift

Rates traders are now indicating that the most intense global tightening period in a generation has reached its conclusion, and monetary easing is anticipated to commence from mid-2024.

According to data compiled by Bloomberg, swaps are pointing to the likelihood that the average cash rate for developed economies will remain steady over the next six months, marking the first time in two years that they haven't factored in a hike within that timeframe. These swaps also suggest a 50-basis point reduction in the combined rate within a year, reflecting the most significant speculation on easing since the onset of the pandemic.

Across various regions, including Europe, the US, and Australia, bonds have experienced a rebound this month as traders speculate that central banks might soon put a stop to their monetary tightening efforts as price pressures ease. However, the decision to make such a bet is not without risk, as previous similar predictions backfired due to inflation proving more persistent than expected and the failure of anticipated recession to materialize.

Prashant Newnaha, a rates strategist for TD Securities Inc. in Singapore, remarked, "The global data picture suggests higher cash rates are effective in slowing down demand, and the oil price is indicating the same." He further noted that the recent surge in long-end bond prices seems to be driven by renewed pension buying after yields hit new highs, with the decline in oil prices acting as an additional catalyst.

Following the Federal Reserve's hint that it may have completed its series of borrowing cost increases, benchmark 10-year Treasury yields have declined by more than half a percentage point to 4.5% since hitting a 16-year high last month. Similarly, Australian yields of a similar maturity tumbled more than 40 basis points in November after the central bank signaled a more stringent requirement for further tightening.

Investors are Predicting a Shift in the Federal Reserve's Approach

Despite the Bank of Japan setting the stage for a withdrawal of stimulus and the Reserve Bank of Australia raising borrowing costs this week, the outlook for cash rates across global markets has shifted. Traders are betting that the Australian cash rate will remain unchanged a year from now, even if the RBA increases rates in mid-2024.

The European Central Bank is perceived as the most likely to initiate a cutting cycle, with traders pricing in a 68% probability of a rate reduction at its April meeting.

On Thursday, ECB Governing Council member Francois Villeroy de Galhau emphasized that it's premature to discuss a rate cut, stating that it will only happen when "everyone is convinced that inflation will return to 2%."

Investment Disclaimer: The rephrased article is for informational purposes only and should not be regarded as financial advice or a recommendation to make investment decisions. Investors should conduct thorough research and consult with financial advisors before making any investment decisions.

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