Wed, June 26, 2024 at 06:38

• 

  Kang-hoon

  • Hello, Annie.

  • Today, I have some interesting news regarding the U.S. Federal Reserve and the bond market on Wall Street.

  • 
• Annie

  • Oh, that sounds intriguing!

  • What's happening with the Fed?🤔

  
• 

  Kang-hoon

  • Bloomberg reported that there are increasing bets in the bond market that the Fed will cut its benchmark interest rate by three percentage points by the first quarter of next year.

• Annie

  • Three percentage points?

  • That's a significant cut!

  • Why do they think this will happen?

  
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• 

  Kang-hoon

  • Indeed, it's a substantial cut.

  • These bets are based on the options market tied to the Fed's fed funds rate.

  • The expectation is that the benchmark rate will fall to 2.25 percent by the first quarter of next year.

• Annie

  • From the current level of 5.25-5.5% to 2.25-2.5%?

  • That seems unlikely unless there's a major economic downturn.

  
• 

  Kang-hoon

  • Precisely.

  • Such a drastic cut would typically indicate a severe recession.

  • Currently, market participants are expecting a 75 basis points cut by the end of this year, while the Fed projects only 25 basis points by the end of this year and 125 basis points by the end of next year.

• Annie

  • So, why are these bets being placed if the Fed's projections are more conservative?

  
• 

  Kang-hoon

  • Bloomberg interprets these bets as a hedge against possible extreme risks.

  • It's a way for investors to protect themselves in case of an unexpected economic downturn.

• Annie

  • That makes sense.

  • But who is making these bets?

  • Can we identify them?

  
• 

  Kang-hoon

  • Unfortunately, trading in these contracts is anonymous, making it difficult to identify the firms involved.

• Annie

  • Interesting.

  • Do you think this could be a sign of something bigger, like a looming crisis?

  
• 

  Kang-hoon

  • It's possible.

  • In fact, there are related concerns.

  • For example, Wall Street banks have been quietly disposing of real estate bad loans.

  • Some see this as a one-off event, while others fear it could be a harbinger of a bigger crisis.

  • 
• Annie

  • Wow, that's quite alarming.

  • Should we be worried about the market's stability?

  
• 

  Kang-hoon

  • It's definitely something to keep an eye on.

  • The market's current behavior suggests that investors are preparing for potential volatility.

• Annie

  • So, what does this mean for us as investors?

  • Should we be making any changes to our portfolios?

  
• 

  Kang-hoon

  • Given the uncertainty, it might be wise to adopt a more cautious approach.

  • Diversifying your investments and keeping some liquidity could be prudent strategies.

• Annie

  • Got it.

  • Thanks for the advice.

  • One last question: Do you see this news as a positive or negative development for the market?

  
• 

  Kang-hoon

  • I would consider this news as a negative development.

  • The fact that investors are hedging against extreme risks indicates a lack of confidence in the market's stability, which could lead to increased volatility and potential downturns.

• Annie

  • Thank you, Kang-hoon.

  • Your insights are always helpful.😊

  
• 

  Kang-hoon

  • You're welcome, Annie.

  • Stay informed and cautious in these uncertain times.

  • Upon comprehensive consideration, this news is perceived as a 😱Bearish.