After a wave of sell-off, is 5-year US debt OK again?

wallstreetcn ·  Jan 22 16:23

Strong US economic data weakens expectations of interest rate cuts. The five-year US debt plummeted last Friday, but Morgan Stanley and J.P. Morgan Chase believe that future economic data may decline, and there is room for a rebound in the bond market.

Strong economic data released last week further weakened market confidence that the Federal Reserve began cutting interest rates in March. Yields on US bonds of various maturities soared. Among them, 5-year US bonds experienced the worst sell-off since May. Yields climbed 22 basis points to the level of December last year.

However, analysts believe that after this round of sharp decline, five-year US bonds have reached a reasonable point of purchase.

Both major banks believe US debt will rebound

Morgan Stanley believes there is room for a rebound in US debt because it is expected that economic data may unexpectedly decline in the next few weeks.

J.P. Morgan advises investors to buy five-year bonds because the yield has climbed to the level of December last year, but the bank warned that the market's pricing for the Fed to start cutting interest rates early is still too aggressive.

Matthew Hornbach, global head of macro strategy at Morgan Stanley, and other analysts wrote in a January 20 report:

This is the bottom spot we've been looking for. As fiscal support declines and the weather gets colder, we believe there is a downside risk in the US economic activity data released in February.

However, at present, key data including US GDP and the core PEC price index are about to be released, and the bond market is still facing a volatile situation.

On Thursday, the US will announce the preliminary GDP value for the fourth quarter, which is expected to be the strongest quarter of continuous growth since 2021. The core PCE price index that the Federal Reserve values most will be released on Friday. The market expects the index to slow year-on-year for the 11th consecutive month.

These data may further strengthen the market's confidence in a soft landing. However, at present, although the certainty of interest rate cuts is very high, the start time and progress of the easing cycle may be slower than previously anticipated, which has had an impact on the bond market.

Investors have begun to calm expectations of interest rate cuts

The bond market plummeted last Friday, mainly because the University of Michigan Consumer Confidence Index recorded its biggest month-on-month increase since 2005.

After the release of data far exceeding market expectations, the futures market's bet on cutting interest rates in March fell to nearly 40%. The market currently expects the Fed to cut interest rates by 125 basis points this year. Previously, the market expected the Fed to cut interest rates by 150 basis points this year.

William Marshall, head of US interest rate strategy at BNP Paribas, told the media that the bond market has reached a level that requires verification of economic data.

Market prices have clearly taken into account the idea that inflation is falling rapidly, but this requires support from economic activity, and we have not received such support.

Some investors believe that since the Federal Reserve is likely to keep interest rates unchanged this quarter, it is best to be cautious about bonds. Hideo Shimomura, senior portfolio manager at Japanese asset management agency Fivestar Asset Management, told the media:

Investors may be increasingly worried that the Federal Reserve may not turn around at all, or that they have bought too many bonds.

Don't be the last guest at the bond party. As soon as the party is over, please leave quickly.

The next round of US bond bidding (including two-year, five-year, and seven-year treasury bonds) will begin this Tuesday, continuing to put upward pressure on yields.


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