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Bond investors gear up for looming Fed interest rate cuts

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Bond investors gear up for looming Fed interest rate cuts
© Reuters. FILE PHOTO: An eagle tops the U.S. Federal Reserve building’s facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Bond investors are expecting the Federal Reserve to drop its bias toward hiking interest rates at a policy meeting this week to prepare the market for what could be multiple rate cuts this year and the first since the start of the COVID-19 pandemic in 2020.

Portfolio managers have increased bets on long-duration U.S. Treasuries ahead of the meeting, reflecting expectations that yields on those securities will decline as the U.S. central bank moves toward cutting rates. As the economy slows, longer-duration bonds tend to outperform other assets.

Generally, bonds with long maturities and low coupons have the longest duration. These bonds are more sensitive to changes in interest rates.

“We have throughout the past year suggested extending duration in anticipation of the cycle turning,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York.

The Fed is widely expected to hold interest rates steady at the end of its two-day policy meeting on Wednesday, with some investors seeing a possibility that it could ramp up its dovish tone after it was perceived to have pivoted from a tightening policy outlook at its meeting last month.

Seventeen of 19 Fed officials projected at the Dec. 12-13 meeting that the policy rate would be lower by the end of this year, compared to where it was last month. The Fed’s median projection showed the rate falling three-quarters of a percentage point from the current 5.25%-5.50% range.

Guneet Dhingra, managing director and head of U.S. rates strategy at Morgan Stanley in New York, said the Fed could talk more this week about an easing bias. “The only question is how quickly it starts and how fast the easing is.”

In the rate futures market, rate cut bets were a little more aggressive. Federal funds futures, a straightforward measure of where traders believe the U.S. central bank’s benchmark overnight interest rate will be at any given time, have priced in five 25-basis-point cuts for 2024, according to LSEG’s rate probability app.

The market is pricing in the first rate cut to occur at the April 30-May 1 meeting, with a 91% probability. Futures showed less than a 50% chance of a cut at the March 19-20 meeting. Odds of a cut in March were as high as 80% three weeks ago.

LONG DURATION

“We have moved to longer duration for all the portfolios we manage,” said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management in Santa Fe, New Mexico, with around $43 billion in assets under management.

“The bar for reverting back to higher rates is quite high and we’re unlikely to go there,” he added, noting that given how aggressive the Fed’s rate hikes have been over the last two years, a U.S. recession is more likely than not.

Since last month’s meeting, however, U.S. non-farm payrolls data for December and gross domestic product growth for the fourth quarter of 2023 came in surprisingly strong.

Ryan Swift, a bond strategist at BCA Research in Montreal, wrote that with federal funds futures being overly dovish despite a run of generally solid U.S. economic data, the more likely near-term trade for investors is to reduce some of the embedded rate cuts in the futures contracts.

This argues, he said, for keeping portfolio duration close to the benchmark, or maintaining a flat bias.

According to a Reuters poll of economists, the Fed will likely wait until the second quarter of 2024 before cutting rates. Those economists see the June 11-12 meeting as the more likely time for the central bank to lower borrowing costs.

have actually risen about 8 basis points since the Fed’s meeting last month, giving investors some room to go long on Treasuries. As of Monday, 10-year yields were last yielding 4.10%.

Thornburg’s Klingelhofer said a more than 4% yield for 10-year Treasury notes is an attractive entry point for investors.

“I think it’s unlikely that we see 5% again. In order to see above 5% in the 10-year, you have to believe that either we don’t get a recession or the Fed doesn’t cut over the next 10 years,” he added, noting that both are unlikely scenarios.

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Palantir, Anduril join forces with tech groups to bid for Pentagon contracts, FT reports

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(Reuters) – Data analytics firm Palantir Technologies (NASDAQ:) and defense tech company Anduril Industries are in talks with about a dozen competitors to form a consortium that will jointly bid for U.S. government work, the Financial Times reported on Sunday.

The consortium, which could announce agreements with other tech groups as early as January, is expected to include SpaceX, OpenAI, autonomous shipbuilder Saronic and artificial intelligence data group Scale AI, the newspaper said, citing several people with knowledge of the matter.

“We are working together to provide a new generation of defence contractors,” a person involved in developing the group told the newspaper.

The consortium will bring together the heft of some of Silicon Valley’s most valuable companies and will leverage their products to provide a more efficient way of supplying the U.S. government with cutting-edge defence and weapons capabilities, the newspaper added.

Palantir, Anduril, OpenAI, Scale AI and Saronic did not immediately respond to a Reuters request for comment. SpaceX could not be immediately reached for a comment.

Reuters reported earlier this month that President-elect Donald Trump’s planned U.S. government efficiency drive involving Elon Musk could lead to more joint projects between big defense contractors and smaller tech firms in areas such as artificial intelligence, drones and uncrewed submarines.

Musk, who was named as a co-leader of a government efficiency initiative in the incoming government, has indicated that Pentagon spending and priorities will be a target of the efficiency push, spreading anxiety at defense heavyweights such as Boeing (NYSE:) , Northrop Grumman (NYSE:) , Lockheed Martin (NYSE:) and General Dynamics (NYSE:) .

Musk and many small defense tech firms have been aligned in criticizing legacy defense programs like Lockheed Martin’s F-35 fighter jet while calling for mass production of cheaper AI-powered drones, missiles and submarines.

Such views have given major defense contractors more incentive to partner with emerging defense technology players in these areas.

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Weakened Iran could pursue nuclear weapon, White House’s Sullivan says

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By Simon Lewis (JO:)

(Reuters) -The Biden administration is concerned that a weakened Iran could build a nuclear weapon, White House National Security Adviser Jake Sullivan said on Sunday, adding that he was briefing President-elect Donald Trump’s team on the risk.

Iran has suffered setbacks to its regional influence after Israel’s assaults on its allies, Palestinian Hamas and Lebanon’s Hezbollah, followed by the fall of Iran-aligned Syrian President Bashar al-Assad.

Israeli strikes on Iranian facilities, including missile factories and air defenses, have reduced Tehran’s conventional military capabilities, Sullivan told CNN.

“It’s no wonder there are voices (in Iran) saying, ‘Hey, maybe we need to go for a nuclear weapon right now … Maybe we have to revisit our nuclear doctrine’,” Sullivan said.

Iran says its nuclear program is peaceful, but it has expanded uranium enrichment since Trump, in his 2017-2021 presidential term, pulled out of a deal between Tehran and world powers that put restrictions on Iran’s nuclear activity in exchange for sanctions relief.

Sullivan said that there was a risk that Iran might abandon its promise not to build nuclear weapons.

“It’s a risk we are trying to be vigilant about now. It’s a risk that I’m personally briefing the incoming team on,” Sullivan said, adding that he had also consulted with U.S. ally Israel.

Trump, who takes office on Jan. 20, could return to his hardline Iran policy by stepping up sanctions on Iran’s oil industry.

© Reuters. FILE PHOTO: Iranian flag flies in front of the UN office building, housing IAEA headquarters, in Vienna, Austria, May 24, 2021. REUTERS/Lisi Niesner/File Photo

Sullivan said Trump would have an opportunity to pursue diplomacy with Tehran, given Iran’s “weakened state.”

“Maybe he can come around this time, with the situation Iran finds itself in, and actually deliver a nuclear deal that curbs Iran’s nuclear ambitions for the long term,” he said.

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Ukraine says Russian general deliberately targeted Reuters staff in August missile strike

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(Reuters) -Ukraine’s security service has named a Russian general it suspects of ordering a missile strike on a hotel in eastern Ukraine in August and said he acted “with the motive of deliberately killing employees of” Reuters.

The Security Service of Ukraine (SBU) said in a statement on Friday that Colonel General Alexei Kim, a deputy chief of Russia’s General Staff, approved the strike that killed Reuters safety adviser Ryan Evans and wounded two of the agency’s journalists on Aug. 24.

In a statement posted on Telegram messenger the SBU said it was notifying Kim in absentia that he was an official suspect in its investigation into the strike on the Sapphire Hotel in Kramatorsk, a step in Ukrainian criminal proceedings that can later lead to charges.

In a separate, 15-page notice of suspicion, in which the SBU set out findings from its investigation, the agency said that the decision to fire the missile was made “with the motive of deliberately killing employees of the international news agency Reuters who were engaged in journalistic activities in Ukraine”.

The document, which was published on the website of the General Prosecutor’s Office on Friday, said that Kim had received intelligence that Reuters staff were staying in Kramatorsk. It added that Kim would have been “fully aware that the individuals were civilians and not participating in the armed conflict”.

The Russian defence ministry did not respond to a request for comment on the SBU’s findings and has not replied to previous questions about the attack. The Kremlin also did not respond to a request for comment. Kim did not reply to messages sent by Reuters to his mobile telephone seeking comment about the SBU’s statement and whether the strike deliberately targeted Reuters staff.

The SBU did not provide evidence to support its claims, nor say why Russia targeted Reuters. In response to questions from the news agency, the security agency declined to provide further details, saying its criminal investigation was still under way and it was therefore not able to disclose such information.

Reuters has not independently confirmed any of the SBU’s claims.

Reuters said on Friday: “We note the news today from the Ukrainian security services regarding the missile attack on August 24, 2024, on the Sapphire Hotel in Kramatorsk, a civilian target more than 20 km from Russian-occupied territory.”

“The strike had devastating consequences, killing our safety adviser, Ryan Evans, and injuring members of our editorial team. We continue to seek more information about the attack. It is critically important for journalists to be able to report freely and safely,” the statement said.

Reuters declined to comment further on the allegation that its staff were deliberately targeted.

The SBU statement said Kim had been named a suspect under two articles of the Ukrainian criminal code: waging an aggressive war and violating the laws and customs of war.

“It was Kim who signed the directive and gave the combat order to fire on the hotel, where only civilians were staying,” it said.

Evans, a 38-year-old former British soldier who had worked as a safety adviser for Reuters since 2022, was killed instantly in the strike.

The SBU statement gave some details about how the strike had occurred, according to its investigation.

“To carry out the attack, the Russian colonel general involved one of his subordinate missile forces units,” the Ukrainian agency said, adding that the strike was carried out with an Iskander-M ballistic missile.

The SBU did not identify the specific unit.

© Reuters. FILE PHOTO: Reuters safety advisor Ryan Evans holds a cat during a news assignment, as Russia's attack on Ukraine continues, during intense shelling in Kramatorsk, Ukraine, December 26, 2022. REUTERS/Clodagh Kilcoyne/File Photo

Ivan Lyubysh-Kirdey, a videographer for the news agency who was in a room across the corridor, was seriously wounded. Kyiv-based text correspondent Dan Peleschuk was also injured.

The remaining three members of the Reuters team escaped with minor cuts and scratches.

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