Source: Caixin.

Last week, the 10-year Treasury bond yield, known as the "anchor" of global asset pricing, rose by 4.1 basis points, the first weekly increase in three weeks. The mixed performance of the U.S. economy continues to be the focus of bond market traders. The release of the May core PCE price index in the United States this Friday may bring a "small climax" to the market as the first half of the year comes to a close.

Looking at the market trend, the yield on US Treasuries was actually quite volatile in last week's quiet trading during the 'short trading week.' According to a survey released by S&P Global on Friday, the US Composite Purchasing Managers' Index (PMI) tracking manufacturing and service activity in June rose slightly to 54.6, which is the highest level since April 2022, and the final value for May was 54.5. The US manufacturing and service PMIs were both higher than expected and the levels in the previous month, suggesting that the US second quarter economy appears to have ended on a steady note.

On the other hand, other data from May released last week revealed a different picture: retail sales barely grew after a decline in April, housing starts hit their lowest level in nearly four years, and initial jobless claims data showed that the US labor market is cooling off. These mixed data performances undoubtedly left market participants with a lot of uncertainty. Brian Rehling, head of global fixed-income strategy at Wells Fargo & Co Investment Research, said that the 10-year US Treasury yield is currently running in a wide range of 4.70%-3.80% - roughly between the high point touched in April and the low point touched in December.

"If consumption continues to be resilient, the job market remains strong, and the stock market remains strong, the Fed will postpone rate cuts, so yields may rise from their current levels; But if the situation begins to deteriorate, the Fed may take action earlier, in which case yields may further decline." Rehling said.

For this week's market, Gennadiy Goldberg, chief US interest-rate strategist at Dowling Securities, pointed out that Friday's personal consumption expenditure (PCE) price index may be the main event that the market will focus on, as it is the inflation index that the Fed has favored for the longest period of time.

At present, the good news is that this inflation data is expected to cool further. According to a median forecast from a media survey, economists currently expect the month-over-month increase in the May PCE index to fall from 0.3% to 0%, while the core index, which excludes food and energy, is expected to rise slightly by 0.1%.

In addition, it is expected that the year-over-year increase in both the overall and core PCE price indices will be 2.6%. The year-over-year increase in core PCE prices is expected to fall to its lowest level since March 2021, as this index better reflects potential inflationary pressures.

Earlier, Federal Reserve officials stated that while the retreat in other inflation data, including the Consumer Price Index, after the May meeting was encouraging, they still needed to see several months of inflation progress before deciding to cut rates.

In any case, if the latest data confirms that US inflation is continuing to cool, this may further reinforce market expectations for the Fed to cut rates twice by 25 basis points this year and increase the likelihood of the first cut in September. According to the Chicago Mercantile Exchange's Fed Watch Tool, traders currently expect a 65% chance of a rate cut by the Fed in September.

In addition to a large number of economic data released this week, including the PCE price index, the US Treasury Department will also auction approximately $183 billion in two-year, five-year, and seven-year US Treasuries, which is also worth paying attention to for bond market traders.

It is worth mentioning that last week, the spread between the yield on investment-grade corporate bonds and US Treasuries soared to its highest level in over three months. Many in the industry believe that this is also a manifestation of the increased flight to safety amid political uncertainties such as the French parliamentary election. According to the schedule, the first round of the French National Assembly election will be held on June 30th, and US presidential candidates Biden and Trump will have their first televised debate for the 2024 election at 9 p.m. Eastern Time on June 27th.

As a common benchmark for high-grade bonds, the spread between ICE BofA U.S. Corporate Index and US Treasuries rose to 96 basis points last week, its highest level since mid-March.

Barclays Bank strategist stated in a report last Friday that the partial reason for the sell-off of US corporate bonds is due to the "flight to quality" caused by political uncertainty, and investors turning to safer US Treasury bonds. US Treasury bonds have also rebounded after this month's inflation data was better than expected. They also pointed out that the higher-than-expected issuance of investment-grade corporate bonds is one of the reasons for the widening spread.

For Daniel Krieter, Capital Markets Director of Fixed Income Strategy at Bank of Montreal, it is still too early to assert whether the recent sell-off of corporate bonds is a buying opportunity, or whether the spread has entered a new trading range after strong demand for spreads earlier this year.

In a report last Friday, he said, "We believe that we may not be able to draw any conclusions until the end of the French parliamentary elections, and the spread is unlikely to show substantial performance before this event risk is eliminated."

Editor / jayden