On Tuesday, known as the "Global Asset Pricing Anchor", $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ it further reached its highest level in eight months. The betting game surrounding the Federal Reserve's interest rate direction seems to have completely shifted from a few rate cuts this year to whether there will be any cuts at all...

An increasing number of industry insiders seem to be realizing that the next rate cut by the Federal Reserve is becoming increasingly distant!

Many bond traders are currently preparing to cope with further volatility in the U.S. Treasury market. Options betting indicates that the U.S. 10-Year Treasury Notes Yield is expected to soar to 5% by the end of February, a level not reached since October 2023.

In fact, the current long-term bond yield is already not far from this critical level.

As of Tuesday's New York session close, the yields on U.S. Treasuries of all maturities rose collectively again. Among them, $U.S. 2-Year Treasury Notes Yield (US2Y.BD)$ Increased by 1.7 basis points to 4.302%, $U.S. 5-Year Treasury Notes Yield (US5Y.BD)$ Increased by 3.5 basis points to 4.47%, $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ Increased by 5.9 basis points to 4.69%, $U.S. 30-Year Treasury Bonds Yield (US30Y.BD)$ Increased by 6.9 basis points to 4.916%.

From the hold positions data, along with the recent surge in U.S. Treasury yields, short positions in the futures market are also continuously increasing. Over the past five trading days, the open positions of the 10-Year Treasury Note futures contracts have risen daily, with eight out of the past nine trading days showing an increase. During the market sell-off, the rise in the number of open positions indicates that investors are increasing their put bets.

The latest sell-off in the bond market on Tuesday stemmed from inflation concerns triggered by strong U.S. data.

The data from the Institute for Supply Management (ISM) on Tuesday showed that due to strong demand, the U.S. non-manufacturing PMI rose from 52.1 in November to 54.1 in December, exceeding the market expectation of 53.3. The so-called hard data, including consumer spending, indicates that the U.S. economy is performing robustly in the fourth quarter. In terms of sub-indices, the indicator measuring the prices paid for raw materials and services rose over 6 points to 64.4. The recovery in business activity and the increase in orders both indicate strong demand, which has heightened concerns about persistent inflation.

Moreover, the Job Openings and Labor Turnover Survey (JOLTS) data released by the U.S. Bureau of Labor Statistics on Tuesday also showed that the number of job openings increased from a revised 7.83 million in October to 8.1 million in November, surpassing the expectations of all economists surveyed in the industry. The new job openings mostly came from professional industries and business services, as well as finance and insurance. There were decreases in vacancies in lodging, food services, and manufacturing.

Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, stated that this gives the impression that the U.S. economy is accelerating again. Positive seasonal factors may make the data appear stronger than it actually is. This is the real factor driving the trend in U.S. Treasuries.

Tracy Chen, a portfolio manager at Brandywine Global Investment Management, mentioned that this data reinforces the market's view that the U.S. economy is strong and interest rates have moved away from restrictive ranges.

As the pressure on U.S. Treasuries continues to expand, the $39 billion 10-year Treasury bond auction conducted by the U.S. Treasury on Tuesday also saw weak demand again, with the winning yield for this 10-year Treasury auction being 4.680%, marking a new high since August 2007, significantly higher than the last auction (December 11) which had a winning yield of 4.235%. This was also the first instance since October of last year where a tail spread occurred, with the winning yield being 0.2 basis points higher than the pre-issue yield.

The next rate cut seems a long way off.

In fact, just at the end of September last year, traders fully expected the Federal Reserve to cut rates again in March, but now, it seems that people are increasingly uncertain about when the next rate cut will happen.

From the movements in the interest rate swap market, as several U.S. data points were hot on Tuesday, traders are no longer betting fully that the Federal Reserve will cut rates by the end of July.

Deutsche Bank's chart shows that of the 14 Fed easing cycles since 1966, the current cycle is the second worst for 10-Year U.S. Treasury performance so far. Since the Fed started raising interest rates in mid-September last year, the yield on the 10-Year Treasury has risen by about 100 basis points. The only weaker easing cycle was in 1981, when there was extreme volatility in Fed policies and rates toward the end of Volcker's era of inflation squashing.

Currently, many industry insiders also expect that as long as inflation remains above the 2% target, the Fed will be more cautious about further rate cuts this year.

Dan Mulholland, head of interest rate trading and sales at Crews & Associates, said, "The market is indeed digesting higher terminal rates, and the level currently being digested is around 4%—which is only 25 basis points away from the current federal funds rate level."

It is worth mentioning that at the American Economic Association (AEA) conference held last weekend in San Francisco, several prominent economists present believed that the Fed is likely to remain inactive this year, even if a rate cut might occur only once.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, stated that Fed Chairman Powell and his colleagues signaled a "clear pause in rate hikes" during the December meeting. At that time, the Fed said in its policy statement that it would reassess the economic situation "to consider further adjustments to the degree and timing of policy changes."

Zentner believes that this statement means: "If we are to take other actions, we will inform everyone"—which communicates a firmer tone than merely discussing skipping a meeting.

Jason Furman, a former senior economist in the Obama administration and current Harvard University professor, believes that if the labor market remains healthy, the Fed may only cut the benchmark interest rate once this year. He also pointed out that the Fed has entered a new phase where it "needs a reason" to cut rates. Last year, the Fed's view was "everything is fine, so why not cut rates?"

Bill Adams, a strategist at Comerica Bank, stated, "The Fed is likely to shift from lowering rates at each meeting between (originally expected) September and December to a long pause in rate cuts until 2025."

If the U.S. 10-Year Treasury Notes Yield, which serves as the "anchor for global asset pricing," remains high for an extended period amid obstacles to interest rate cuts, it could clearly put pressure on other Assets. This has already been reflected in Tuesday's market performance: the Nasdaq and the S&P 500 Index both closed down by more than 1%.

"An increase in yield doesn't necessarily indicate a problem for the stock market," said Kenny Polcari, a strategist at SlateStone Wealth, "but if inflation rises, then an increase in yield will become problematic."

As the well-known financial blog zerohedge recently mentioned, investors may once again need to pay attention to when this crocodile mouth (the decoupling of the inverse relationship between U.S. Bonds yield and U.S. stock performance) will suddenly close.

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Editor/rice