WASHINGTON • Traders are pulling back from bets that the Federal Reserve will raise interest rates in June as inflation expectations crumble.
The odds of a hike have fallen back to about 44 per cent from more than 60 per cent earlier this month, based on a gauge compiled by Bloomberg.
Yields on contracts for federal fund futures for June and July are retreating as investors scale back forecasts for a move.
Two-year Treasury yields, among the most sensitive to Fed policy expectations, are poised for their first two-month rally in a year.
Investors are questioning the strength of the US economy and the Fed's plan to raise rates three times this year after a weaker-than-expected jobs gain last month and a surprise monthly drop in consumer prices. They are also voicing disappointment that President Donald Trump's proposed tax cuts and infrastructure spending plans have yet to materialise.
"There is a kind of shock in the market," said Mr Kazuaki Oh'E, the head of fixed income at CIBC World Markets Japan in Tokyo. "People are starting to doubt whether the Fed can raise rates (as soon as this summer)."
The Unites States' tensions with North Korea as well as elections in Britain and France are added risks to the global economy.
Fed futures traders were wrong-footed earlier this year when they bet against a rate hike at the March 14-15 meeting.
They priced the odds at less than an even chance as late as Feb 24, before a flood of hawkish Fed speakers forced them to see an increase as all but certain a week later.
For now, two-year Treasury notes are also flashing warnings that the Fed will hold off in June.
The Fed will probably raise rates once more this year, but no more, said bond manager Yusuke Ito at Asset Management One.
"The strength of the US economy has been exaggerated, especially after Trump's election," he said. "Things may get worse."