Source: Finance Association

The rebound in the US Treasury bond market came to an abrupt end overnight, and the resurgence of the sell-off was largely due to the fact that the “top three” of the Federal Reserve mentioned two words in their latest speech: “raise interest rates”!

New York Federal Reserve Chairman John Williams (John Williams), the “No. 3 person” of the Federal Reserve, said in response to questions at a meeting in Washington on Thursday that another rate hike was not his basic prediction. But he also added, “If the data reminds us that we need to raise interest rates to achieve our goals, then we obviously want to do that.”

Shortly after his words fell, the 2-year US Treasury yield quickly soared by about 5 basis points to around 4.99%, once again approaching the 5% mark, close to the high end of the recent fluctuation range.

As of the end of the New York session, US bond yields for all matures rose across the board. Among them, 2-year US Treasury yields rose 5 basis points to 4.993%, 5-year US Treasury yields rose 5.5 basis points to 4.679%, 10-year US Treasury yields rose 4.2 basis points to 4.636%, and 30-year US Treasury yields rose 2.5 basis points to 4.73%.

In fact, there were quite a few US Federal Reserve officials who made public speeches last night, including Atlanta Federal Reserve Chairman Bostic, Minneapolis Federal Reserve Chairman Kashkari, etc., all made extremely hawkish speeches, but given that the latter few officials have previously stated that there is a possibility that interest rates will not be cut this year, their old hawkish remarks clearly cannot be compared to the importance of Williams' latest statement.

Some industry insiders said that Williams' latest speech was definitely more hawkish than his comments earlier in the past week. Although Williams also emphasized that interest rate hikes are not his “baseline scenario,” he has already begun to focus on the upward risk of inflation in his latest speech, and stated that he does not feel that cutting interest rates is urgent. In contrast, in an interview on Monday, he also said that if US inflation continues to slow gradually, the Federal Reserve is likely to start cutting interest rates during the year, which is clearly much more moderate compared to today's remarks.

Judging from the pricing of the interest rate market, one detail that has not been easily noticed recently is that for some short time in the past two trading days, the possibility that the Fed will raise interest rates in May is even greater than the possibility of cutting interest rates (although the probability of both is minimal, the next meeting of the Federal Reserve will almost certainly stand still)...

On Thursday, the interest rate swap market predicted that the Federal Reserve would only cut interest rates by a cumulative total of 38 basis points until the December meeting, less than the 43 basis points forecast at the close of Wednesday.

In the bond market, after last week's US inflation data was higher than expected, US bond yields have continued to impact the high in the fourth quarter of last year. Faced with strong economic data and statements from Federal Reserve officials, a large number of fund managers and strategists have had to rethink their assumptions about interest rate prospects. According to the data, the Bloomberg US Treasury Composite Index has accumulated a cumulative decline of nearly 2% so far this month, completely recovering the 1.3% increase in March.

“US Treasury yields have taken a turn and have risen to the level of a few months ago,” said Aoifinn Devitt, chief global market strategist at Moneta.

Some industry insiders have begun to worry that the 10-year US Treasury yield, known as the “anchor of global asset pricing,” may return to 5%. Ales Koutny, head of international interest rates at Vanguard, said that the US Treasury bond market is approaching a level that could trigger a large-scale sell-off, and the 10-year US Treasury yield is likely to return to 5%.

Koutny said, “We are in a dangerous zone. Even a slight increase — breaking through the 4.75% key level, could force investors to abandon their bets on a rebound in US bonds, which in turn will trigger a wave of sell-offs and push yields to 2007 highs.”

And this scene is likely to put more pressure on the outlook for US stocks. On Wall Street, there has always been the slang phrase “sell in May, then leave,” but May of this year hasn't arrived yet, and some of the original bulls seem to have begun rolling up and evacuating early.

The S&P 500 index fell 0.2% on Thursday for the fifth consecutive trading day. Looking back at the trend of this index, since October 2023 (the Federal Reserve's “turning pigeon”), the S&P 500 index has not declined for five consecutive days before. The Nasdaq Composite Index also fell 0.5% on Thursday. So far, both have dropped close to 5% in April.

Whether it's the Russell 2000 Index, the Dow, the S&P 500 Index, or the NASDAQ (chart below from top to bottom), they are all experiencing the strongest pullback since September last year.

Julian Emanuel, chief stock and quantitative strategist at Evercore ISI, said that after falling back from previous month's all-time high, the stock market is witnessing the beginning of a decline, which may continue until the rest of 2024. Emanuel reiterated the target of the S&P 500 falling to 4,750 points before the end of the year, which means that the S&P 500 index will drop more than 5% from Thursday's closing price of 5011 points.

editor/tolk