Bond Market Insights - Fri, 21 Mar 2025

A volatile session for USTs in the aftermath of the Fed. Rates were left unchanged but Chair Powell’s dovish tone contrasted with a more hawkish dot plot. Caution is still the word, with Powell emphasizing downside risks to growth and a greater willingness to cut rates if needed.

Another surprise was the Fed’s decision to sharply slow the pace of quantitative tightening. According to the new plan implies an annualized runoff of only $250 billion, well below earlier expectations. This adjustment suggests the Fed is becoming more cautious about liquidity conditions and supports the broader dovish tilt in policy communication. Markets now anticipate that balance sheet runoff could conclude as early as Q1 2026.

Recent U.S. data has been relatively stable. Existing home sales beat expectations by a wide margin in February, rising 4.2% m/m against forecasts for a 3% decline. This brings the level of home sales back toward the upper end of the two-year range.

Labour data remains steady. Initial jobless claims held at 223,000 last week, while continuing claims rose slightly to 1.89 million. The Philadelphia Fed business survey softened slightly to 12.5 in March but remains elevated. Notably, the employment sub-index jumped to its highest level since October 2022, reinforcing the view that the labour market remains strong enough to support consumer spending and growth.

Several central banks are adjusting their tone:

The Bank of England held its policy rate steady at 4.5% with an 8-1 vote. The messaging was more hawkish than anticipated, with the majority expressing caution around the pace of disinflation. This could delay the expected rate cutting cycle, although four rate cuts are still pencilled in for the year.

In Canada, Governor Macklem signalled a new approach, saying policy will be “less forward-looking” and more reactive, predictable given what is happening south of the border.

The Swiss National Bank surprised markets with a 25bp rate cut to 0.25%, despite upward revisions to inflation projections. Sweden’s Riksbank held rates steady at 2.25% but adopted a more balanced tone, noting two-sided inflation risks rather than the previous bias toward the upside.

ECB’s Klaas Knot, typically hawkish, remarked he was “open-minded” about a rate cut in April, a signal that the ECB might be closer to a policy pivot than previously thought.

In APAC, China shows signs of acceleration. Economic momentum in India and South Korea is slowing. stoking expectations of rate cuts. Indonesia is also slowing,  In Australia, a weak February employment report (-52.8k jobs) may not be enough to shift the Reserve Bank of Australia’s stance, but markets remain focused on the Q1 CPI due April 30 to confirm the trajectory.

WTI crude gained 1.6% to $68.25 after the imposition of new sanctions on Iranian oil producers, with potential implications for Chinese refiners. Gold reached a new all-time high, supported by falling real yields and lingering geopolitical tensions.