19 March 2025
Federal Open Market Committee (FOMC)
- The US Federal Reserve (Fed) kept its key interest rate unchanged at the target range of 4.25% – 4.50% and continue to signal 50 basis points (bps) rate cut projection in 2025.The move mirrors their decision from the last meeting in January which is broadly expected by the market. In reaction to the announcement US Treasury (UST) 2y plunged by 6.8bps to close at 3.97% while UST 10y fell 4.1bps to close at 4.24%. The dollar index (DXY) softened from trading day-high of 103.9 but firmed at 0.2% gain to close at 103.43 in reaction to the FOMC meeting. Correspondingly, the USDMYR exchange rate saw a depreciation of 0.21% to 4.4360 to open the market due to the pressure from the strengthened dollar.
- The Fed will slow the pace of monthly runoff of its UST holdings from USD25bn to USD5bn starting in April. As the Fed slows the pace to reduce its balance sheet (also known as quantitative tightening), UST yields would face downward pressure in the near-term as the move would effectively add USD20 billion of monthly liquidity into the UST market.
- The updated dot plot match December 2024’s rate cut projection. The median forecast from Dot Plot suggests that policymakers maintain the expectation of two rate cuts for 2025. Fed Chair Powell stated that the U.S. economy remains robust putting the Fed in a good position to wait for further clarity. Moving forward, the Fed continues to monitor
- The Fed’s economic outlook called for lower economic growth and higher inflation.The Fed has taken a more pessimistic stance on economic growth, adjusting their GDP growth forecasts downward to 1.7% for 2025 (Dec’24: 2.1%) and 1.8% for 2026 (Dec’25: 2.0%). Inflation forecast for 2025 was revised upward with core PCE projected at 2.8% for 2025 (Dec’25: 2.5%), while forecast for 2026 and 2027 remained unchanged at 2.2% and 2.0%, respectively. Powell also acknowledged the effect of tariffs policies accounts for the higher inflation forecast but to be transitory in his base case.
Opus View
- We continue to see additional rate cuts in 2025, with the view of up to 50 basis points total rate cut. The forecast for rate cuts would be highly dependent on the US economy outlook including growth, inflation and unemployment. We continue to closely monitor the effects from the policy developments related to trade tariffs and retaliation, tax reforms, and other economic measures introduced by the Trump administration.
- Locally, the reaction is relatively muted with government bonds only inching down by 1-2 bps from previous closing. The local bond market is still supported by the reduction in supply and demand from local institutions.
- For 2025, we opine that yield remains favorable for the bond market with lesser reward to pursue longer duration as yield curve remains flat. We will maintain our duration between 4 – 6 years while focusing on high quality corporate bonds for yield pick-up.
Disclaimer
The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity. Individual investors should contact their own licensed financial professional advisor to determine the most appropriate investment options. This material contains the opinions of the manager, based on assumptions or market conditions and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information provided herein may include data or opinion that has been obtained from, or is based on, sources believed to be reliable, but is not guaranteed as to the accuracy or completeness of the information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Opus Asset Management Sdn Bhd and its employees accept no liability whatsoever with respect to the use of this material or its contents.
