Source: Sina Finance

As the situation where the Federal Reserve will not cut interest rates this year seems to intensify, bond market traders are preparing for 10-year US Treasury yields to exceed 5%.

Schroder is shorting US debt for part of the term, and stubborn inflation heightens the risk that interest rates will remain high for a longer period of time. Pimco (Pimco) expects the Federal Reserve to relax policy at a more gradual pace than other developed market central banks, and the possibility that interest rates will not be cut at all this year “cannot be ignored.”

These views highlight the rapid transformation of the global bond market pattern. Just a few months ago, the mainstream view in the market was that interest rates were expected to be cut by 25 basis points six times starting in March. The US core CPI exceeded expectations for three consecutive months, and US bonds experienced the biggest drop in a single day since August 2022. Since then, the voices of bond bears have become louder.

“I don't think it's impossible to achieve a 10-year yield of 5% or more,” said Kellie Wood, Schroder's associate head of fixed income in Sydney. The company is also preparing for “the possibility that the Federal Reserve will not cut interest rates at all this year.” The asset management company holds short positions on US 2-year, 5-year, and 10-year treasury bonds.

The 10-year US Treasury yield remained stable during the Asian trading session on Thursday, breaking 4.5% for the first time since November last year on the previous trading day. The global bond market was similarly sold off, putting pressure on Japanese, New Zealand, and Australian treasury bonds.

Although most investors still expect to cut interest rates once or twice this year, they believe that as strong US data pushes back the expected schedule, they increasingly need to hedge against unadjusted policies. Swap market traders soon adjusted their expectations for the first rate cut from September to November, while Wall Street strategists such as Goldman Sachs also readjusted their expectations.

“This is an option that is likely to happen,” Ben Emons, Newedge Wealth's senior portfolio manager in Connecticut, said on the issue that the US will not cut interest rates this year. He added that as the market focuses on new inflation risks, the 10-year yield could launch an all-out attack on the 5.30% high.

Abrdn Plc is seeking to shorten the tenure of US debt portfolios of 10 years or more, as market pricing reflects a “stronger growth background,” said Ray Sharma-Ong, multi-asset Southeast Asia director based in Singapore. The term usually measures how sensitive a bond's price is to changes in interest rates.

According to some, the current inflation trend is similar to the situation at the end of 2021, when price pressure proved to be ongoing, laying the foundation for the Federal Reserve's hawkish rate hike. At the time, central bankers initially downplayed the impact of soaring inflation and thought it was temporary, but a few months later, the most aggressive cycle of interest rate hikes in decades began.

“This is also evident today. Investors are delaying possible interest rate cuts until later this year, and expect future policy positions to be more hawkish,” said Jim Reid, global head of economic and subject research at Deutsche Bank in London.

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