Financial markets are undergoing a severe downturn, with each decline heightening the expectation within the credit sector that the Federal Reserve will soon step in to provide assistance.
Bitcoin (BTC), the largest cryptocurrency by market capitalization, has dropped 8% to $75,800, while U.S. stocks are positioned for their most significant three-day decline. S&P 500 futures fell roughly 5% just on Monday, with overall losses nearing 15%.
The Fed has a track record of intervening during financial crises through rate cuts and other measures to stimulate the economy. As a result, traders, who have grown accustomed to such liquidity support, are wagering that the Fed will follow suit once again.
The federal funds futures market, as reported by the CME FedWatch Tool, is now anticipating as many as five rate cuts in 2025. For the upcoming meeting on May 7, there’s a 61% chance of a 25 basis point reduction, which would bring the target range down to 4.25–4.50%. By the end of the year, projections suggest the federal funds rate could plummet to as low as 3.00–3.25%.
The risk-off sentiment, combined with fears of slower growth and expectations of Fed rate cuts, is resulting in declining Treasury yields, which aligns with the preferences of the Trump administration. The critical 10-year yield—an essential indicator for the U.S. economy—has fallen to 3.923%.
The prevailing view is that decreasing yields will simplify the Treasury’s process of refinancing trillions of dollars in debt over the next year, which might explain the administration’s relative ease regarding the downturn in asset prices.
This urgency to refinance stems from a shift in policy under former Treasury Secretary Janet Yellen, who transitioned from issuing longer-dated coupons to favoring short-term Treasury bills. Since the start of 2023, approximately two-thirds of the deficit has been financed through the issuance of these bills—short-term debt with interest rates around 5%. While this approach may have temporarily upheld liquidity, it also set the stage for a looming challenge of expensive short-term debt that must now be rolled over.