Source: Finance Association

After continuing to rise over the past week, US bond yields finally declined somewhat on Wednesday, temporarily easing the sell-off in the bond market for many days. No major indicators were released in terms of economic data on Wednesday, but the release of the Federal Reserve's Beige Book and the New York Federal Reserve Open Market Operation Annual Report still attracted the attention of some investors. The latter, in particular, has a clear plan for the Federal Reserve's next exit from QT.

According to market data, US Treasury yields fell across the board overnight. Among them, 2-year US Treasury yields fell 5.3 basis points to 4.943%, 5-year US Treasury yields fell 8.4 basis points to 4.624%, 10-year US Treasury yields fell 7.9 basis points to 4.594%, and 30-year US Treasury yields fell 6.1 basis points to 4.705%.

Joe Kalish, chief global macro strategist at Ned Davis Research, said that in view of the recent sharp drop in the bond market and the fact that the Federal Reserve as a whole still guarantees that interest rates will be cut this year, some investors may be trying to make a profit and settle locked in profits.

Kalish said, “Powell confirmed this week that the Federal Reserve will not consider raising interest rates again, as some analysts speculate. This indicates that interest rate cuts have been postponed, but they have not been completely derailed,” he added. The two-year US Treasury yield once reached above 5%, which seems very attractive.

The US Treasury Department held a bid sale of 13 billion US Treasury bonds on Wednesday. Although the bid interest rate reached the second highest level on record, judging from various other indicators, this auction still received strong demand, which also eased the pressure on the bond market.

According to reports, the bid interest rate for this bid sale is 4.818%. Although it is much higher than the previous 4.542% rate (March 19), it is about 2.5 basis points lower than the 4.843% pre-issue interest rate. The bid multiplier for this auction was 2.82, the highest since June last year, and also higher than the average of 2.65 for the past six renewals.

Over the past few weeks, investors and the Federal Reserve have reassessed the need to cut interest rates at a time when US economic data continues to show signs of resilience, which has led to a sell-off in the bond market. Federal Reserve Chairman Powell said in his latest speech on Tuesday, “Before cutting interest rates, they need to see the drivers of inflation weaken. If inflation continues to rise, we can keep interest rates at current limit levels for as long as necessary.”

In response, many industry insiders believe that although the sell-off in the bond market eased somewhat on Wednesday, it is clearly not yet time to completely turn the crisis into safety. Sam Millette, head of fixed income at the Commonwealth Financial Network, said that the market is breathing after experiencing a significant sell-off last week, but if other economic data or Federal Reserve officials suggest that inflation may accelerate again, then the easing of sales on Wednesday may be short-lived.

“Powell made it clear that the Federal Reserve is willing to maintain high interest rates for a longer period of time and continue to rely on data, which may push 10-year US Treasury yields back to the nearly 20-year high they hit in October last year,” Millette added.

The “Beige Book” report on the state of the economy released by the Federal Reserve on Wednesday shows that US economic activity has “expanded slightly” in recent weeks, and companies say it is becoming more difficult to pass on costs. The Beige Book also mentioned that half of the regional federal banks have noticed the rise in energy prices, and some federal banks have indicated that insurance rates are rising. As businesses struggle to pass these costs on to consumers and customers, their profit margins are under pressure.

Furthermore, according to the two scenarios predicted by the New York Federal Reserve in its annual report, the Federal Reserve may end its contraction in mid-2025 or the beginning of the year, and the bank reserve balance will drop to around 2.5 trillion or 3 trillion US dollars the following year. Federal Reserve officials began discussions on slowing down the downsizing at last month's policy meeting, but no decision was made at the meeting.

Under the “more reserves” scenario described in the New York Federal Reserve report, the balance sheet size will be reduced to around 6.5 trillion US dollars, while under the “less reserves” scenario, the balance sheet size will drop to 6 trillion US dollars.

editor/tolk