The later the Federal Reserve begins the normalization process, the more things it may need to do, and there is still room for a rebound in US debt.
Non-agricultural supermarket expectations combined with Powell's reaffirmation that they will not act too fast, prompting traders to drastically cut their bets on interest rate cuts before May, but the market is still hopeful that US bonds will rise.
Overnight, an interview program with Federal Reserve Chairman Powell was broadcast, which reiterated the risk of acting prematurely — “The work has not been fully completed, and the good data for the past six months may not be a true indicator of the trend of inflation to some extent.”
This statement, combined with the unexpected strong non-farm payrolls in January, dampened market expectations of interest rate cuts. US bonds declined in early Asian trading on Monday, and the yield on the benchmark 10-year US bond climbed 6 basis points to 4.08%.
However, there is still widespread expectation that the Federal Reserve will start cutting interest rates in the middle of the year, which sets the bottom line for the bond market. Whenever yields soar, buyers tend to re-pour in to try to lock in relatively high returns before yields fall.
Although the current state of the US economy means there is no urgency to cut interest rates, policymakers are also aware of the risk of keeping interest rates high for a long time. The current interest rate range is 5.25% to 5.5%, which is more than double the neutral growth level. As the inflation rate declined, there was enough room to reduce interest rate cuts.
Therefore, there may still be room for a rebound in US debt. Priya Misra, portfolio manager at J.P. Morgan Asset Management, believes:
Uncertainty about the timing of the Federal Reserve's action has increased the appeal of five-year US bonds. She believes that five-year US bonds may benefit from a longer period of interest rate cuts. The later the Federal Reserve begins the normalization process, the greater the lag, and the more things it may need to do.
Bank of America interest rate strategist Bruno Braizinha advises investors to prepare for the risk of 10-year US Treasury yields falling to 3% this year.
If the market starts to lower the price of the Federal Reserve's neutral policy interest rate, it may lower yields. Furthermore, there is still a risk that the economy will be impacted, which will cause expectations of a “soft landing” of the economy to fall short, and inflation may also begin to fall more sharply.
Editor/Somer