Bond Investors Minimize Bets as US Election Overshadows Fed Meeting

• Bond investors are keeping a defensive but neutral stance in managing portfolios ahead of this week's Federal Reserve policy meeting, which is being eclipsed by the too-close-to-call U.S. presidential election.
• Investors widely expect the U.S. central bank's policy-setting Federal Open Market Committee to cut its benchmark interest rate by 25 basis points to the 4.50%-4.75% range at the end of its two-day meeting on Thursday, which was delayed one day because of Tuesday's election. The Fed slashed its policy rate by a hefty 50 basis points when it launched its easing cycle in September.
• The election has been the focus for bond investors the last few weeks, more so than the Fed meeting. And until a winner is declared, investors are being cautious with their allocations, keeping their powder dry.
• Bond investors all year have been extending duration, or buying longer-dated assets, as they braced for Fed easing and possible recession. That remains the popular trade in bonds even after the election.
• If rates fall, bond prices will likely increase, and longer-dated notes and bonds have historically outperformed shorter-duration assets like cash and Treasury bills in rate-cutting cycles.
• Over the last few weeks, market participants said there has been some position-squaring among institutional investors in the futures market, suggesting caution, ahead of the election and Fed meeting. Asset managers use long contracts in Treasury futures to fulfil portfolio needs.
• Commodity Futures Trading Commission data showed asset managers have reduced net long positions on U.S. 10-year note futures that were at a record high as of Oct 1. Other players in Treasury futures have also reduced extreme long or short bets in the last few weeks.

(Source: Reuters)