Some investors bet peak policy rate is near ahead of Fed decision By Reuters

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – As Treasuries wobble ahead of the outcome of the Federal Reserve’s monetary policy meeting on Wednesday, some investors are buying into the weakness, confident that a peak in interest rates will eventually lift the market for U.S. government debt.

It’s a bet that has backfired several times in the past year, as stronger-than-expected economic growth forced investors to recalibrate views for how soon the U.S. central bank would cut rates, keeping Treasury yields elevated. Yields move inversely to bond prices.

Bullish investors, however, believe ebbing inflation and looming threats to U.S. growth in the fourth quarter make it likely that the peak for rates – and in turn, Treasury yields – is approaching.

“Our view is that the Fed is done (raising rates),” said Chris Diaz, portfolio manager and co-head of global taxable fixed income at Brown Advisory. “If conditions stay the way they are, growth is going to weaken,” allowing the Fed to lower rates.”

Yields on benchmark 10-year Treasury notes hit 4.366% on Aug. 22, the highest level since 2007. Their surge over the last several weeks reflects the view that the Fed is likely to leave rates around current levels for longer than many investors had previously expected.

Others, however, say it’s only a matter of time until the Fed’s monetary policy tightening pressures the economy and forces policymakers to cut rates. Additionally, many believe a 400-basis-point climb in the from its post-pandemic low leaves little downside for government bonds.

Diaz said his firm has “more duration than our benchmarks,” meaning it has increased bets on longer-dated Treasuries in anticipation of rising prices.

Data from the Commodity Futures Trading Commission showed investors reduced short positioning on the U.S. five-year and 10-year Treasury futures in the latest week. Net shorts on benchmark 10-year futures have fallen for two straight weeks, while those on five-year futures have contracted about 18% from record levels in early August.

Investors widely expect the U.S. central bank’s policy-setting Federal Open Market Committee to keep its benchmark overnight interest rate unchanged in the 5.25%-5.50% target range at the end of a two-day meeting on Wednesday.

Futures bets tied to the Fed’s key policy rate on Tuesday were pricing less than…