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The bond market is increasingly turning dovish on rate hikes from the U.S. Federal Reserve. In September last year, the bond market was pricing two rate hikes from the U.S. Federal Reserve in 2019, while the Fed had forecasted three rate hikes. Since then it has gradually turned more dovish and in recent weeks, the pace has significantly increased.
Just a month ago, the bond market was pricing one rate hike in 2019 with 66 percent probability, and just a week ago, the probability was at 14 percent, a significant drop no doubt; but the bond market has turned more dovish since. Currently, it is pricing just 3.7 percent chance of a rate hike and 25.6 percent chance of a rate cut.
Bond market has always been instrumental in forecasting the actual rate hikes from the Federal Recession and to assess the recession probability, it is very likely this time that the market is currently overpricing the possibility of weakness in the U.S. economy, and underpricing the possibility of rate hikes from the Federal Reserve, just like it did for 2018 initially, leading to a rally in the USD once the repricing takes place.
Currently, the USD is taking the heat as the bond market turn dovish, but that could change quickly if the economy proves to be performing well.
