Source: Finance Association

Almost nine months have passed since the Federal Reserve completed its last rate hike in July last year. However, the current trend in the US bond market is causing more and more market participants to begin to wonder whether the Fed's interest rate hike cycle has actually ended...

US bond yields are showing a trend contrary to common sense in the past: a long time has passed since the Federal Reserve may have completed the interest rate hike cycle, yet the benchmark 10-year US Treasury yield continues to rise, and bond prices continue to fall.

Padhraic Garvey, head of American regional research at Dutch International Group, said that the current trend in 10-year US Treasury yields is almost completely different from when US interest rates peaked in the past. He pointed out that if the Federal Reserve had actually completed the rate hike, then the 10-year US Treasury yield would be far from falling to the expected level — three months after the Fed's last rate hike in July last year, the yield hit a 5% cycle high in October last year, and is still high.

“If a Martian lands on Earth, take a quick look at the current 10-year yield trend, it is likely that it will come to the conclusion that the Federal Reserve has not completed raising interest rates at all,” Garvey said.

The last time Federal Reserve policymakers raised interest rates was on July 26 of last year, when Federal Reserve officials raised the federal funds target rate range to 5.25% to 5.5% — the highest in 22 years. In November of last year, Federal Reserve Chairman Powell hinted that the Federal Reserve had completed interest rate hikes; by December of last year, the Federal Reserve predicted in the interest rate bitmap that it would cut interest rates three times, 25 basis points each time in 2024.

At the beginning of this year, interest rate market traders expected the Federal Reserve to cut interest rates up to six or seven times, then reduced the expected number of interest rate cuts to two or three times. Currently, they are putting off their interest rate cuts until the second half of this year.

It can be said that this series of hawkish changes have made people deeply question the Fed's promise to cut interest rates this year, and this has also caused their concerns about a larger sell-off of long-term US government bonds.

Judging from the causes, steady labor market data and fluctuations in inflation data in the US are undoubtedly the key to causing such market turbulence. And putting all of this up to this week is also making the US CPI data for March, which is about to be released tonight, particularly influential.

Tonight, the CPI “tough battle” unfolding like never before...

Judging from the overnight trend, US bond yields of various maturities generally fell from a high level on Tuesday. Due to some low absorption purchases after a recent series of sell-offs, bond investors are also waiting for Wednesday's inflation data to determine the next interest rate path.

By the end of the New York session, US Treasury yields had fallen across the board. 2-year US Treasury yields fell 4.2 basis points to 4.755%, 5-year US Treasury yields fell 5.2 basis points to 4.383%, 10-year US Treasury yields fell 5.6 basis points to 4.369%, and 30-year US Treasury yields fell 5.3 basis points to 4.5%.

Many industry insiders said that Wednesday's inflation data has become an important puzzle for investors to evaluate whether the Federal Reserve can cut interest rates later this year. According to the latest forecasts of industry economists, the overall US CPI is likely to continue to accelerate in March, with CPI rising 3.5% year over year. Excluding energy and food, the core CPI growth rate is expected to drop to 3.7%.

Padhraic Garvey, head of American research at ING (ING), said: “The background is that yields have seen a reasonably sharp rise in the past week or so, and the market had a slight resurgence before Wednesday's Consumer Price Index (CPI) data was released. This data will be critical.”

He pointed out, “Any day, there will be an excuse for bond yields to fall, because future interest rate cuts by the Federal Reserve are the biggest 'carrots.' The biggest 'stumbling block' is the US data. The US data so far does not match the claim of interest rate cuts.”

It is worth mentioning that just before tonight's CPI “tough battle” began, the flow of capital in the US fixed income market was quite unusual. At the time of the release of this critical inflation report, treasury traders have become so bearish that they risk being trampled when the inflation data is better than expected.

Weekly position data from the US Commodity Futures Trading Commission (CFTC) shows that in the face of the recent rise in US yields, funds that use loan funds to amplify earnings have increased their short positions in the treasury bond futures market for the first time in two months. J.P. Morgan's latest customer survey also showed that as of April 8, there was a marked increase in short positions, causing customers to have net neutral positions rather than net long positions for the first time in nearly a year.

However, according to changes in open positions, the US bond market experienced another increase in short positions during the trading sessions on Friday and Monday, which shows that traders are hedging the risk of further increases in treasury bond yields.

However, Wells Fargo analysts wrote in an April 5 report that in a situation where the market is so bearish (bond market), lower inflation data is likely to trigger a more intense reaction. They wrote, “In the face of the recent poor performance of the bond market, we believe that if the increase in core CPI falls below the 0.3% month-on-month forecast, then the reaction of US bond yields will be more intense than when the core CPI is higher than expected.”

There are already signs that some investors may want to close their bearish bets before the CPI data is released.

On Tuesday, a major transaction in US short-term interest rate futures reached a record high, helping to drive a rebound in treasury bond prices. The deal involves Guaranteed Overnight Financing Rate (SOFR) futures, which were launched in May 2018 and have succeeded Eurodollar futures as the main instrument for betting on interest rates set by the Federal Reserve.

The data shows that shortly after 9 a.m. New York time on Tuesday, 75,000 December 2024 SOFR futures contracts changed hands through bulk trading. CME has confirmed that this is the largest transaction for this product so far. The SOFR futures trading price then rose, indicating that the transaction was initiated by the buyer, and US bond yields fell further to an intraday low. Bulk transactions are privately negotiated, single-price transactions, and must meet a minimum size threshold.

If the US March CPI data released tonight performs well, causing expectations that the Federal Reserve will cut interest rates three times this year to heat up again, then direct long positions on this contract will profit. Of course, the trade may also be aimed at recovering short positions, thereby reducing risk before the data is released.

In any case, with yields at a high point during the year, the emergence of large transactions such as this may be an early sign that some people think the bond market is overcrowded with bearish power. As to whether this is true, tonight's bond market will undoubtedly provide the answer...

editor/tolk