BlackRock Warns On Bonds, Saying Fed Rate Bets Are Overdone

(Bloomberg) --BlackRock Inc. strategists turned underweight short-dated US Treasuries from overweight, saying the extent of Federal Reserve interest-rate cuts the market is betting on is unlikely to pan out.

Wei Li, the firm's chief investment strategist, said speculation that the Fed waited too long to ease and will now be forced to cut at an accelerated pace to shore up the economy is misplaced. In an interview with Bloomberg TV, she said she expects the Fed will lower rates by 25 basis points on Wednesday.

“We think markets are a bit excessive in pricing the depth of the rate-cut cycle,” Li said. “The cutting cycle is starting, but maybe not as deep as markets seem to be pricing.”

The yield on the policy-sensitive two-year note traded near the lowest since September 2022 on Monday — a rally that doesn't tempt Li.

The strategist favors Treasuries with intermediate maturities known as the belly of the curve, in the five- to 10-year range, because of the relatively high yields.

Swaps tied to the Fed's decision on Wednesday are now pricing in more than a 50% chance of a half-point cut, after virtually discounting the possibility entirely last week. Investors expect around 118 basis points of cuts by the end of December. By the end of 2025 they see the benchmark below 3%.

Ebbing inflation and softening employment data have reignited the debate over whether the central bank should ease rates gradually or “go big” — the preferred option of former New York Fed President and Bloomberg Opinion columnist Bill Dudley.

While Li acknowledges recession risks may have increased, she said her base case is still for the US economy to slow down rather than to contract. At the same time, policymakers remain wary of “persistent” inflation in some parts of the economy, she said.

“We are talking about job creation averaging 164K in the last six months,” she said. “This is still a pretty robust pace.”