Rate cuts priced too early get handed back

When the market prices rate cuts well ahead of what the central bank is signalling, the intermediate part of the curve is where the disappointment shows first. It is the maturity most tied to the path of policy over the next few years.

Borrowing from the future

Pricing cuts early pulls yields down now, on the assumption that the cuts arrive on schedule. If they come later, or fewer of them come at all, yields have to rise back to meet reality. The gain was borrowed, and it gets handed back.

The front end reacts to the next meeting. The intermediate maturities react to the whole path, which is exactly what is being mispriced.

What I'm watching

• Cuts priced into futures against the central bank's projections
• Core inflation, which decides whether early cuts are possible
• Labour market data, the other half of the mandate

Where I stand

Short, on intermediate duration while the market is ahead of the central bank. The view is about the gap, not about the direction of policy.

What would change my mind

Inflation cooling fast enough that the central bank catches up with the market. Then the early pricing was simply correct, and the gap closes from the other side.