US Bond Market Cautious Ahead of Fed Meeting Amid Inflation Uncertainty

The US bond market is approaching the Federal Reserve's policy meeting on Wednesday with caution due to uncertainty surrounding inflation. Investors are positioning themselves in high-quality assets and avoiding large directional bets, according to Gertrude Chavez-Dreyfuss of Reuters.

Most investors expect the Fed to leave benchmark rates unchanged at 3.50%-3.75%, but a surge in energy prices has complicated this outlook. U.S. consumer inflation slowed in June, but remains above the Fed's target rate of 2%.

Portfolio managers are emphasizing liquidity and flexibility as they wait for more data on inflation and employment. JPMorgan's Treasury Client Survey showed little change in investor positioning from a week earlier, with long, short, and neutral positions remaining near their four-week averages.

Jason Granet, chief investment officer at BNY, said that 'there's a real chance it could go in either direction' regarding the Fed's decision. He expects rates to move higher over time but believes trying to monetize this view via large wagers is imprudent.