Bond traders anticipate recession as Fed considers further rate hikes

© Reuters.

Investing.com - Bond traders are increasingly betting that the US Federal Reserve's potential interest rate hikes could lead the country into a recession. Following a pause in the central bank’s rate increases, officials have indicated they may raise rates by another half-point this year. This has led to the yield-curve inversion widening and skepticism growing among bond traders about policymakers' ability to prevent an economic downturn.

As inflation remains above twice their 2% target, officials continue advocating for higher borrowing costs. Some experts argue that this approach might exacerbate credit contraction and losses from increased rates, with George Goncalves of MUFG stating that easing would now require something to "break" or the economy to falter.

Concerns over tighter monetary policy causing a recession within the next year are also shared by 61% of Bloomberg terminal users who participated in a recent poll following Federal Open Market Committee decisions. Michael Cudzil of Pacific Investment Management Co suggests that market participants believe these hikes could backfire and bring the Fed closer to ending its tightening cycle.

Despite projections hinting at two more quarter-point increases by year-end, markets remain unconvinced that borrowing costs will rise according to central bankers' expectations. Michael de Pass from Citadel Securities believes that aggressive outlooks on rate hikes may be intended to curb bond-market anticipations for cuts in upcoming months.