Strong economic data and expectations of rekindled inflation due to Trump's reelection lead traders to weaken their expectations for the magnitude and speed of rate cuts, while some analysts warn that the market may have overreacted.

However, US bonds were sold off this week, with yields rising across the board. The yield on the US 10-year Treasury notes increased by about 15 basis points, reaching its highest level since July.

A series of changes in the US market have also impacted global markets: the US dollar has risen by over 3% in the past month, pushing the US dollar to over 150 against the Japanese yen. Japanese officials have issued warnings about the weak yen, and the Mexican peso has also come under pressure.

The sharp decline in US bonds is due to a drastic cooling of investors' rate cut expectations. After the significant 50 basis point rate cut by the Federal Reserve in September, traders originally expected at least another 25 basis point cut this year. However, current trading in the swaps market indicates a significantly increased likelihood that the Federal Reserve will keep rates unchanged in the remaining two meetings this year.

Analysis points out that investors are shifting from overestimating rate cuts by the Federal Reserve at the beginning of the year to another extreme of underestimating rate cuts.

The pendulum is swinging in the other direction.

Analysts warn that US bond yields may have risen too high, as the US and most other major central banks globally are still expected to continue their rate cutting cycles.

Rob Burrows, ​​government bonds fund manager at M&G Investments, stated that the dovish expectations for the Fed's interest rate cut at the beginning of the year are due to investors' fear of "missing the rate-cut cycle", which stems from the era of low interest rates after the global financial crisis. When strong employment data support the view that drastic rate cuts are not needed, the market "gets scared".

Jim Caron, Chief Investment Officer of the Investment Solutions division at Morgan Stanley Investment Management, also believes that inflation has been declining while the Fed is still expected to cut rates.

Ed Al-Hussainy, Senior Global Interest Rate Strategist at Columbia Threadneedle Investments, stated that from investors overestimating the extent of Fed rate cuts to underestimating them, the "pendulum has swung in another direction":

"My sense is that in the current market, they are so sensitive to the increase in fiscal deficits that they underestimate the actions the Fed must take."

The uncertainty in the US bond market has been "locked in".

Against the backdrop of strong US economic data, bond yields are rising, market volatility is returning, and analysts have differing views on the Fed's rate cut path.

Akshay Singal, Head of Global Short-Term Interest Rate Trading at Citigroup, stated that the path of rate cuts is "much broader than in the past", and the Fed may not cut rates at all in 2025, or it could cut by 125 basis points or even more. Singal added:

"The uncertainty arises from multiple aspects - economic fundamentals, the Fed's response, and the political environment that may drive changes in fiscal policy."

William Vaughan, deputy portfolio manager at Brandywine Global Investment Management, stated that the global bond market is "locked in volatility in the short to medium term", as investors await the United Kingdom budget, the U.S. elections, and monetary policy decisions from key central banks around the world.

In addition, the expectation of a Trump victory has increased, also increasing market expectations of reignited inflation, thereby exerting upward pressure on bond yields.

Now, U.S. bond investors are preparing for uncertainty during the election period and the economy. Caron stated:

"Ultimately, U.S. bond yields may remain at a constrained level, which is unlikely to be the start of a new trend of rising yields, but just an adjustment."

Editor/Lambor