At a time when the probability of the Federal Reserve cutting interest rates in March fell to 40%, big and small investors thought they could buy US bonds again ·  Jan 23 17:13

① Traders in the federal funds rate futures market have recently predicted that the possibility that the Fed will cut interest rates in March has dropped to about 40%; ② However, what is quite interesting is that at a time when market interest rate cuts are frequently being hit, some industry insiders currently think that it is now possible to buy US bonds again.

Financial Services Association, January 23: US bond yields fell slightly on Monday, as many investors began to take advantage of the recent drop in US bond prices to buy again. Multiple sets of economic data to be released later this week may affect the Federal Reserve's estimate of the future path of interest rates.

Market data shows that most US bond yields for various matures fell overnight. Among them, 2-year US Treasury yields rose 0.5 basis points to 4.4%, 5-year US Treasury yields fell 2.7 basis points to 4.033%, 10-year US Treasury yields fell 2.5 basis points to 4.11%, and 30-year US Treasury yields fell 1.5 basis points to 4.322%.

US bond yields have risen sharply in the past few weeks, as Fed policymakers at the beginning of the new year dampened market speculation that interest rates will be cut soon as inflation cools down.

Traders in the federal funds rate futures market recently predicted that the possibility that the Fed would cut interest rates in March had dropped to about 40%, yet at the beginning of the year, this probability once exceeded 80%. As traders lowered their expectations for the Federal Reserve to cut interest rates for the first time in March, they are now more concerned about the possibility of action in May.

Despite high interest rates, a series of indicators released by the US last week still showed resilience, which suggests that the Federal Reserve may not shift to easing restrictions as soon as previously anticipated. Currently, the 10-year US Treasury yield, known as the “anchor of global asset pricing,” has risen by more than 20 basis points from the close of the last trading day of 2023 (about 3.86%).

Do the biggest players in the industry think they can buy it again?

However, what is quite interesting is that at a time when expectations of interest rate cuts in the market have been hit frequently and US debt continues to cool down at the beginning of the year, some industry insiders currently believe that it is now possible to buy US bonds again.

After the worst decline in US five-year treasury bonds last week since May last year, Wall Street's two major investment banks, Morgan Stanley and J.P. Morgan Chase, both suggested that investors could try to repurchase treasury bonds with this maturity.

Analysts such as Matthew Hornbach, global head of macro strategy at Morgan Stanley, wrote in a January 20 report, “This is the decline we have been waiting for. Due to reduced financial support and colder weather, we believe there is a downside risk in the US economic activity data released in February.”

J.P. Morgan also advises investors to buy five-year treasury bonds because the yield on this term treasury bond has climbed to the level of December last year, but J.P. Morgan also warned that the market's pricing for the Federal Reserve to start cutting interest rates early is still too aggressive. J.P. Morgan predicts that the Federal Reserve will cut interest rates for the first time in June rather than May. Currently, the swap agreement has fully priced the May interest rate cut.

Jonathan Mondillo, head of fixed income in North America at Aberdn Asset Management (Abrdn), said that the decline in US bond yields on Monday was “just a correction to the gains we saw last week.”

Mondillo believes that portfolio managers still have quite a bit of cash in their hands, and that US bonds are a good place to invest.

Looking ahead to this week, investors will focus closely on the fourth quarter gross domestic product (GDP) data released on Thursday and the personal consumption expenditure (PCE) price index data released on Friday.

The US Treasury's debt issuance schedule is also quite intensive this week: it will bid 60 billion US dollars of two-year treasury bonds on Tuesday, 61 billion US dollars of five-year treasury bonds on Wednesday, and 41 billion US dollars of seven-year treasury bonds on Thursday. Some industry insiders are still worried that this may put upward pressure on US bond yields.


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