Sino-US trade war cools down, traders bet that the Fed will only cut interest rates twice in 2025.

With the agreement between China and the United States to reduce tariffs and ease trade tensions, expectations for the magnitude of interest rate cuts by the Federal Reserve significantly cooled in the financial markets. It is expected that there will only be two rate cuts in the whole of 2025. According to data on interest rate swap contracts tracking Federal Reserve interest rate meetings, the market now expects a cumulative rate cut of only 56 basis points by December, a significant decrease from the 75 basis points predicted last week. While traders still generally believe that the first rate cut of 25 basis points will occur in September, expectations for overall rate cuts in 2025 have noticeably shrunk. As a result, the two-year US Treasury yield, sensitive to monetary policy, surged by 12 basis points on Monday, reaching above the 4% mark and maintaining around that level by the New York close. The rise in US Treasury yields and the cooling of rate cut expectations resonate with each other, reflecting the boost to the economy from the reduction in tariffs as bond market bulls accelerate their exit. Risk assets rebounded significantly at the start of the week, further reducing the attractiveness of US Treasuries. Since the Federal Reserve announced its interest rate meeting statement and Chair Powell stated an adoptive attitude to evaluate how tariffs will affect inflation and growth, market expectations for the Fed's rate cut path have continued to adjust. In the past week, the two-year US Treasury yield has risen from a low point of 3.55%, while the five-year Treasury yield has increased from around 3.85% to 4.11%. Ed Al-Hussainy, rate strategist at Columbia Threadneedle Investments, said: "Markets tend to overreact, with funds shifting massively towards risk assets." The institution leans towards shorting short-term bonds, with Al-Hussainy pointing out that the two-year US Treasuries would only be attractive at a low point when the market pricing reflects less than two rate cuts in 2025. Just last month, the bond market expected the Fed to resume its easing cycle in June and implement four 25-basis-point rate cuts throughout the year to counter the impact of the trade war on the economy. Now, traders' expectations are gradually converging towards the Fed officials' prediction of only two rate cuts in 2025 made in March, as strong employment data and stubborn inflation outlook make the market believe that the Fed will maintain its policy stance. Data from the Chicago Mercantile Exchange shows a surge in bearish interest rate options in the past week, with over 275,000 open put options contracts betting that the Fed will not cut rates this year. Wall Street's forecasts for the magnitude of rate cuts this year underscore the high uncertainty in the direction of monetary policy. Expectations from major bank economists range from zero to as high as 100 basis points. Most large banks expect to start the rate cut cycle in July or September, with two to three rate cuts expected throughout the year. For example, Citigroup postponed its rate cut timing prediction from June to July after the US announced a tariff reduction from 145% to 30% on Chinese goods within 90 days. However, they anticipate rate cuts at every meeting from July to January next year, with a cumulative total of 125 basis points.