J.P. Morgan Asset Management: The Fed's interest rate cut may be larger than expected to drive short-term U.S. Treasuries higher

J.P. Morgan Asset Management said that as the U.S. economy slows, the Federal Reserve may cut interest rates more than it currently suggests, which in turn will push short-term U.S. bonds higher. “The market is currently pricing in a rate cut of about 1.5%, which is perhaps a reasonable central scenario,” said Seamus Mac Gorain, the firm’s global head of Intrerest Rate. In recent months, there has been a huge disagreement in the market about how much the Fed is likely to cut rates this year. The Fed’s latest dot plot released on December 13 showed that policymakers’ median forecast was a 75bp rate cut by the end of the year. Market expectations were more hawkish, with the Intrerest Rate swap market pricing in a drop of nearly 160 basis points at the end of December, falling back to around 140 basis points this week.