Bond investors are preparing for a potential economic slowdown in the U.S. by reducing risky investments and increasing their exposure to longer-term assets in their fixed-income portfolios. This shift is influenced by the Federal Reserve's cautious approach to interest rate cuts.

Leading up to the Federal Open Market Committee meeting this week, investors have been lengthening the duration of their bond holdings, expecting yields to decrease further. This trend suggests that the bond market is anticipating a more significant rate-cutting cycle than initially predicted. Notably, J.P. Morgan's latest Treasury Client Survey indicated that investors have the largest net-long position on Treasuries since 2010, which could signal a potential reversal in bond yields in the short term.

Analysts attribute the bond market's prolonged positioning partly to concerns about a possible recession, exacerbated by the Trump administration's aggressive tariff policies that could spark a global trade war. Investors are prioritizing duration over credit given the uncertainty surrounding future economic policies and their impact on market conditions.

Market participants, such as Christian Hoffmann from Thornburg Investment Management, have adjusted their portfolios to favor longer-duration assets due to uncertainties in the economic landscape. Despite ongoing economic stability, worries persist about the potential consequences of fluctuating policies and geopolitical tensions on market dynamics.

Traders in U.S. federal funds futures anticipate that the Federal Reserve will maintain interest rates at 4.25%-4.50% following the meeting, with expectations of gradual rate cuts into 2025. Fed Chair Jerome Powell is likely to emphasize a patient approach to rate adjustments during the press briefing, reflecting the central bank's need for more clarity on economic policies before making significant changes.