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Monetary Policy2025-09-02
Fed Rate Cut Probability Rises to 80% in September, Bullish Outlook for Bond and REIT ETFs
With improving economic indicators and easing inflation, the probability of a Fed rate cut in September has risen to 80%. As a result, rate-sensitive assets such as bond ETFs and REIT ETFs are expected to rally.
Admin
As the probability of a Federal Reserve rate cut in September rises sharply, investor attention is focusing on rate-sensitive assets. With recently released PCE inflation data and employment figures supporting a Fed policy pivot toward easing, long-term bond ETFs and Real Estate Investment Trust (REIT) ETFs are drawing attention as the primary beneficiaries.
Rising Rate Cut Expectations
According to the CME FedWatch tool, the probability of a 0.25% rate cut at the September FOMC meeting stands at 80%, with some quarters also raising the possibility of a 0.5% jumbo cut. The August PCE price index fell to 2.5% year-over-year, and core PCE came in at 2.6%, signaling easing inflationary pressures. Fed Chair Jerome Powell strongly hinted at a policy pivot at the Jackson Hole speech, stating that "the time has come to adjust monetary policy."
Long-Term Bond ETFs Surge
On rate cut expectations, TLT, the 20+ year U.S. Treasury bond ETF, surged 4.2% last week. IEF, which tracks 7-10 year intermediate Treasuries, also gained 2.8%. Since bond prices and interest rates move inversely, the rate cut outlook is driving bond ETF prices higher. In particular, longer-duration bonds are more sensitive to rate changes, which is why TLT posted a larger gain.
REIT ETFs Rally in Tandem
Real estate investment trust ETFs also reacted strongly to rate cut expectations. VNQ, a leading REIT ETF, rose 3.1% last week, while SCHH, which specializes in residential real estate, surged 3.8%. The real estate sector is highly dependent on borrowing and is therefore sensitive to interest rate movements; in a low-rate environment, dividend yields are viewed as relatively attractive. In particular, REITs investing in high-growth real estate such as data centers and logistics facilities are attracting significant attention.
Investment Strategy and Cautions
In the early stages of a rate-cutting cycle, bond and REIT ETFs generally deliver strong performance, but there are several points investors should keep in mind. First, if rate cuts proceed faster than expected, recession concerns could widen credit spreads, leading to higher volatility in investment-grade corporate bond ETFs (LQD) and high-yield bond ETFs (HYG). Second, REITs vary significantly by geography and sector, so investing in a diversified REIT ETF is the safer approach. Third, once rate cuts are actually implemented, a "buy the rumor, sell the news" dynamic may cause a temporary pullback, making a dollar-cost averaging strategy advisable.
Conclusion
As the likelihood of a Fed rate cut increases, the investment appeal of bond and REIT ETFs has grown significantly. However, since markets have already priced in a considerable portion of this expectation, investors would be well-served to maintain appropriate allocations and adopt a phased investment approach. In particular, the performance of credit-risk assets may diverge depending on the economic outlook following the rate cuts, making ongoing monitoring essential.
