Bond investors are anticipating a Federal Reserve rate cut by buying longer-term maturities and betting on a steeper yield curve. The Fed is expected to lower rates by 25 basis points to the 4.00%-4.25% range due to a weakening labor market and moderate inflation. Fixed income investors are adding duration to their portfolios to take advantage of lower rates.

Investors are confident in the Fed’s readiness to reduce borrowing costs following weak data on job growth and rising unemployment rates. Consumer Price Index for August was higher than expected, but producer prices were more benign. The market trend favors bond-buying in anticipation of rate cuts.

Vishal Khanduja from Morgan Stanley has increased duration in his portfolio in the five-to-ten-year sectors. J.P. Morgan’s Treasury survey showed an increase in clients long on duration. Money market funds are extending duration in anticipation of rate cuts, with government and prime funds lengthening their average maturities.

Options on SOFR futures imply lower rates during the September-December period, with large volumes on the September three-month expiry call options. Investors continue to pile on steepeners, particularly in the Treasury five-year/30-year yield curve. The U.S. 5-year/30-year yield curve recently reached its widest point in over four years.

The Fed is set to release updated economic projections and rate forecasts, including the “dot plot.” Analysts anticipate a median projection showing two further rate reductions this year. Inflation concerns could impact the curve, with the potential for a steeper curve if tariffs spur the Fed to pause its easing cycle.

Read more at Yahoo Finance: Fed rate-cut optimism has bond investors focusing on duration, steeper yield curve