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How bond traders are betting the Fed will declare an early end to balance sheet runoff

Sunny Oh
How bond traders are betting the Fed will declare an early end to balance sheet runoff

Traders are placing bets on the U.S. government bond yield curve to steepen ahead of the conclusion of the Federal Reserve’s two-day meeting on Wednesday, even as global growth fears keep interest rates capped. Perhaps more so than economic optimism, analysts said such wagers could partly reflect short-term trading strategies around expectations for the Fed to signal tweaks to the central bank’s balance sheet runoff process. Traders are simultaneously buying short-dated bonds and selling their longer-dated peers to profit from an early end to the Fed’s normalization of its $4 trillion portfolio this year, which could widen the spread between short-dated yields and long-dated yields, an indicator of the yield curve’s slope.