① The sharp drop in US bond prices this year has once again made bond market traders who have had a hard time improving last year feel disgraced and quite embarrassed; ② And this week, the gains and losses of a key psychological line of defense will undoubtedly attract the attention of industry insiders; ③ Will the 10-year US bond yield, known as the “anchor of global asset pricing,” rise above the 4.5% mark in one fell swoop?
Financial Services Association, April 7 (Editor: Xiaoxiang) The sharp drop in US bond prices this year has once again made bond market traders, who had a hard time improving last year, disgraced and quite embarrassed. And this week, the gains and losses of a key psychological line of defense will undoubtedly attract the attention of industry insiders — will the 10-year US Treasury yield, known as the “anchor of global asset pricing,” rise above the 4.5% mark in one fell swoop?
Recently, surprisingly strong US economic data performance has pushed US bond yields to the highest level since the end of November. More and more investors are withdrawing their bets on the Federal Reserve's drastic interest rate cuts during the year. It is expected that Fed policymakers will be wary of easing monetary policy too soon. On Friday, US debt fell further after the number of non-farm payrolls in the US unexpectedly hit the biggest increase in nearly a year in March.
This has led many investors to view the US March Consumer Price Index (CPI) report to be released on Wednesday as the next key event — this data will likely determine whether yields will stabilize or move to new highs. Meanwhile, many believe that 4.5% has become the next critical threshold for 10-year US Treasury yields, which is currently only slightly above the 4.4% level at the close of last Friday.
Kevin Flanagan, head of fixed income strategy at WisdomTree, said, “This (the direction of US bonds) will largely depend on CPI data — it may keep the yield in the 4% to 4.5% range, and it may also increase the yield even more. The main risk in the bond market now is that the US employment report continues to be steady, while the improvement (decline) of inflation has stagnated.”
Since this year, the US Treasury bond market has been trying to find bottom support. Because the US economy continues to exceed expectations, the idea that the Federal Reserve should have started cutting interest rates now to stimulate economic growth “unfortunately fell through.” Although the resilience shown by the economy helped push US stocks higher, the bond market is clearly not that lucky — the prospect that the economy will continue to grow steadily has heightened concerns about secondary inflation, putting pressure on longer-term bonds.
As shown in the chart below, US Treasury bonds have just experienced their worst weekly performance in six months, and the entire US bond yield curve is currently at the highest level in the year. The inverse between bond yields and prices.
The gains and losses at the 4.5% mark attracted much attention
Stephen Bartolini, fixed income portfolio manager at T. Rowe Price Group, said in March that if the 10-year US Treasury yield rises above 4.4%, he is ready to take action (bottom cut) at any time. But later, after a few trade-offs, he revised this statement, stating that his portfolio is now more inclined to bet on a possible further increase in yield.
He said, “If a month or two months ago, the 4.5% yield (entry) would have looked pretty good, but now I want to be a little more patient because the economy is stronger. The recent data is definitely better than expected, and we saw that last week as well. Inflation is stronger than most people expected.”
Bond market strategists Ira F. Jersey and Will Hoffman said that if the 10-year US Treasury yield continues to move towards 4.51% in the coming week, the momentum indicator may reach an area consistent with stagnant upward trends or partial pullback signals. The next target after breaking through 4.51% will be the high yield of 4.7% in early November 2023.
Many economists and Wall Streeters expect that the US CPI data to be released on Wednesday will further reveal whether US inflationary pressure has eased, and this will also be critical to whether the 10-year US Treasury yield will rise above the 4.5% mark.
According to the forecasts of economists surveyed by the media, the overall and core CPI of the US is expected to rise 0.3% month-on-month in March, down from 0.4% in February. However, this will still increase the core inflation indicator by about 3.7% year over year, far higher than the Federal Reserve's 2% inflation target. However, the recent sharp rise in oil prices may cast a shadow over the future outlook for US inflation.
It is easy to predict that if this CPI data is basically in line with or below the expected level, it may help slow the rise in US bond yields, or even pull them back from recent levels. But on the other hand, if the CPI data “unfortunately” exceeds expectations, it may trigger a new round of bond market sell-off.
Of course, some fund managers are now also saying that if the 10-year US Treasury yield rises above 4.5%, institutional investors may buy it again. Ed Al-Hussainy, an interest rate strategist at Threadneedle Investments, pointed out that if the yield on US bonds reaches 4.5%, they will actively enter the market next week.
Priya Misra, portfolio manager at J.P. Morgan Asset Management, said she thought it was time to start switching back to 10-year treasury bonds. She pointed out that despite a strong labor market, wage increases have been suppressed, which shows that demand for jobs has not increased upward pressure on inflation.
Editor/Somer