US bond yields had mixed ups and downs on Wednesday, continuing the overall lackluster market trend so far this week. The US Consumer Price Index (CPI) for December, which will be announced by the US Department of Labor tonight, is expected to provide more clues about when the Federal Reserve may start cutting interest rates. Before this major risk event, the overall wait-and-see sentiment in the US bond market was quite strong.

Market data shows that US bond yields of various maturities generally fell into a sideways tug-of-war overnight, and there was generally little fluctuation throughout the day. By the end of the New York session, 2-year US Treasury yields fell 0.4 basis points to 4.371%, 5-year US Treasury yields rose 0.2 basis points to 3.98%, 10-year US Treasury yields rose 1.5 basis points to 4.035%, and 30-year US Treasury yields rose 1.9 basis points to 4.209%.

Overall demand for the 10-year US bond bid on Wednesday improved. The final bid interest rate was 4.024%, and the bid multiplier reached 2.56 times, up from 2.53 times last month and 2.48 times the average value of previous bids. According to Action Economics, this is the best level since February.

The allocation rate for indirect bidders, including foreign central banks, was 66.1%, up from 63.8% last month.

Zachary Griffiths, senior investment level strategist at CreditSights, said, “Demand for 10-year US bonds seems to be quite stable. Judging from today's 10-year bid demand, the 5% yield level seems far away.”

The US Treasury will also bid for $21 billion of 30-year bonds on Thursday. However, tonight's market's main focus will probably not be on bond bidding — the December CPI data to be released by the US Department of Labor on Thursday will further reveal when the Federal Reserve is likely to start cutting interest rates. Not only investors in the bond market, but investors in the stock market, foreign exchange, and commodities will pay close attention to this.

According to industry surveys, the year-on-year increase in the US CPI in December may pick up again after a lapse of four months. Currently, the forecast is 3.2%, up from 3.1% the previous month. However, the good news is that the year-on-year increase in core CPI is expected to decline further in December. It is expected to fall to 3.8%, compared to the previous value of 4%. This indicates that the US core CPI data will fall back to the “3 era” for the first time after the Federal Reserve's aggressive interest rate hikes in the past two years.

“Everyone is waiting for Thursday's CPI, which will lay the foundation for the next wave of comments from the Federal Reserve,” said Will Compernolle, macro strategist at FHN Financial in New York. “Therefore, I think the current trend in US bonds is a pre-CPI position adjustment.”

He believes that the 0.3% core inflation rate may still be too high, which may push back the timing of the first interest rate cut from March to May.

Currently, betting on the interest rate swap market shows that traders expect the probability that the Federal Reserve will cut interest rates in March is about 2/3. For the whole of 2024, traders are betting that interest rates will be cut roughly five times, 25 basis points each time, thus bringing the Federal Reserve's federal funds rate close to 4% at the end of the year.

“We believe it is realistic to start a cycle of interest rate cuts in March. This is a view we have held since October. Everything depends on inflation data,” Griffiths pointed out.

The survey predicts that US bond yields remained flat in the first half of the year and declined in the second half of the year

Of course, even if the expectation that the Fed will cut interest rates in March can be fulfilled after two months, whether US bond yields will immediately begin a further decline is still uncertain, because the market has basically absorbed the impact of the Fed's interest rate cuts in the past few months.

According to a survey of bond strategists released by industry media this week, 10-year US bond yields are likely to fluctuate narrowly around current levels in the next 6 months, then fall further in the second half of the year. Since hitting a high of 5.02% in October last year, the indicator US 10-year US Treasury yield has fallen by more than 120 basis points.

This survey of 62 bond strategists from January 5 to 10 predicts that the 10-year US Treasury yield will only rise by about 10 basis points to 4.10% in the next 3 months, which is 15 basis points lower than the December survey. Steven Major, global head of fixed income research at HSBC, said, “Our prediction is that the yield on US bonds will remain basically the same for the next three months; although this sounds really boring, this is how bonds currently work.”

He added, “I have a very strong feeling that the next big fluctuation in yield will decline, but it will occur in the second half of the year because the market needs to see the central bank's actual actions rather than pure expectations.”

The survey predicts that the 10-year US Treasury yield is expected to be at 3.93% by the end of June, then drop to 3.75% by the end of the year. The smaller sample of US Tier 1 traders had higher predictions. The two sets of predictions were 4.00% and 3.88%, respectively.

The yield on 2-year US Treasury bonds, which are most sensitive to interest rates, is currently around 4.37%. The survey predicts that it will remain stable over the next 3 months, then drop to 4.00% by the end of June, and fall further by 50 basis points to 3.50% by the end of the year.

If this happens, the inversion between 2-year and 10-year US Treasury yields will completely disappear, and there will be a positive spread of 25 basis points by the end of 2024.

Editor/Corrine