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Markets in Freefall: Is the Credit Market Forcing the Fed’s Hand?
Futures now price in up to five rate cuts in 2025 as investors bet on an aggressive policy pivot.
Updated Apr 7, 2025, 1:48 p.m. Published Apr 7, 2025, 8:37 a.m.
What to know:
- BTC and S&P 500 futures are down over 5% Monday, with the latter pushing toward its worst three-day performance ever, with total losses nearing 15%.
- The credit market is now pricing in up to five rate cuts in 2025, signaling a dramatic shift in expectations for the Fed policy.
Financial markets are in a meltdown and every leg lower is strengthening expectations in the credit market that the Fed will soon offer support.
Bitcoin , the leading cryptocurrency by market value, traded 8% lower at $75,800 and the U.S. stocks were on track for their worst three-day performance, with S&P 500 futures down roughly 5% on Monday alone and losses approaching 15% overall.
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The Fed has a history of intervening during financial meltdowns with rate cuts and other stimulus measures. So, traders, having become accustomed to liquidity support, are betting that the Fed will act similarly this time.
According to the CME FedWatch Tool, the federal funds futures market is now pricing in as many as five rate cuts in 2025. For the upcoming May 7 meeting, there's a 61% probability of a 25 basis point cut, which would lower the target range to 4.25–4.50%. By year-end, the market sees the fed funds rate falling as low as 3.00–3.25%.
The risk-off, coupled with the growth scare and Fed rate cut bets, is giving Trump administration what it wants – plunging Treasury yields. The all-important 10-year yield — the benchmark for the U.S. economy — has dropped to 3.923%.
The popular narrative is that lower yields would make it easier for the Treasury to refinance trillions of dollars in debt in the coming 12 months, which is why the Trump administration may be more tolerant of the asset market swoon.
This refinancing urgency stems from a policy shift under former Treasury Secretary Janet Yellen, who moved from longer-dated coupon issuance to short-term Treasury bills. Since 2023, about two-thirds of the deficit had been financed through bill issuance — short-term debt with rates hovering around 5%. While this may have temporarily supported liquidity, it created a ticking time bomb of expensive short-term debt that now needs to be rolled over.
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Japan’s Higher Rates Puts Bitcoin in the Crosshairs of a Yen Carry Unwind
A stronger yen typically coincides with de-risking across macro portfolios, and that dynamic could tighten liquidity conditions that recently helped bitcoin rebound from November’s lows.
What to know:
- The Bank of Japan is expected to raise interest rates to 0.75% at its December meeting, the highest since 1995, affecting global markets including cryptocurrencies.
- A stronger yen could lead to de-risking in macro portfolios, impacting liquidity conditions that have supported bitcoin's recent recovery.
- Governor Kazuo Ueda indicated a high probability of a rate hike, with officials prepared for further tightening if their economic outlook supports it.
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