Source: Finance Federation Author: Xiao Xiang
① As expectations of the Fed's interest rate cuts continue to cool down, and whether they fall during the year has become a hot topic of discussion, US bond traders also seem to have begun preparing for the full return of US bond yields to the “5 era”; ② 2-year US bond yields once rose above the 5% mark during the overnight session, for the first time since November last year.
Financial Services Association, April 12 (Editor: Xiaoxiang) As expectations of the Federal Reserve's interest rate cuts continue to cool down, and whether they fall during the year has become a hot topic of discussion, US bond traders also seem to have begun preparations for a full return to the “5 era” of US bond yields.
Market data shows that although the PPI data released on Thursday was lower than expected, investors are still worried about the prospects for a rebound in US inflation, and US bond yields for multiple matures continued to rise. Among them, the 2-year US Treasury yield once rose above the 5% mark during the overnight session. This was the first time since November of last year that it fell again at the end of the session. Eventually, it fell slightly by 0.8 basis points throughout the day to 4.976%.
In terms of other term yields, as of the end of the New York session, 5-year US Treasury yields rose 3.1 basis points to 4.643%, 10-year US Treasury yields rose 4.5 basis points to 4.596%, and 30-year US Treasury yields rose 5.1 basis points to 4.683%.
Many analysts said that US bond yields surged on Wednesday due to higher than expected US CPI data, which raised doubts about whether the Federal Reserve could cut interest rates this year. The sell-off pressure on the bond market continued on Thursday, although the decline narrowed.
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said, “It usually takes three days for the market to return to normal after being hit by this kind of big shock. We're still working on closing some positions on Thursday, and some sellers who have woken up late are selling.”
According to the latest data released on Thursday, the US producer price index (PPI) rose 0.2% month-on-month in March, lower than the expected 0.3%. However, at the same time, another labor market data is still hot. The number of jobless claims in the US fell more than expected at the beginning of last week, indicating that the labor market is still quite tight. The impact of the two figures on the US bond market has been offset.
Michael Reynolds, vice president of investment strategy at Glenmede, said, “Wednesday's CPI was the real big event. We think the first rate cut in September is most likely, but that means you have to see inflation fall back, and we haven't seen that this year.”
After the release of CPI data that exceeded expectations on Wednesday, traders have lowered their expectations for the number of times the Fed will cut interest rates to less than two times this year, which is significantly lower than the three times predicted on the Fed's bitmap last month. On Thursday, the federal funds rate futures market expected a cumulative rate cut of about 43 basis points this year.
The US Treasury also bid for $22 billion of 30-year Treasury bonds on Thursday. The bid interest rate was 4.671%, which is about 1 basis point higher than the yield on 30-year treasury bonds in the secondary market at the end of the bid. This shows that investors are willing to buy new bonds after requiring a premium.
Is it feared that US debt will completely return to the “5 era”?
In fact, with the exception of 2-year US bonds, which briefly rose above the 5% mark overnight, the yield on 1-year and shorter US Treasury bonds itself is still in the “5 Era” high yield environment. Currently, many industry insiders are focusing on whether 10-year treasury bonds, known as the “anchor of global asset pricing,” will follow suit.
As the situation where the Federal Reserve will not cut interest rates this year seems to intensify, some bond market traders are already preparing for 10-year US bond yields of more than 5%. For example, Schroeder is shorting US debt for part because he believes that stubborn inflation increases the risk that interest rates will remain high for a longer period of time.
Kellie Wood, Schroder's Deputy Head of Fixed Income in Sydney, said, “I don't think it's impossible for 10-year US Treasury yields to reach 5% or more.”
Wood pointed out that the company is still preparing for “the possibility that the Federal Reserve will not cut interest rates at all this year.” Schroder currently holds short positions on US 2-year, 5-year, and 10-year treasury bonds.
Pimco also anticipates that the Federal Reserve will relax its policy at a more gradual pace than other developed market central banks this year, and that the possibility that interest rates will not be cut at all this year “cannot be ignored.”
Speaking about whether there is a risk that the US will not cut interest rates this year, Ben Emon's senior portfolio manager at Newedge Wealth said, “This is a likely option,” he added. As the market focuses on new inflation risks, the 10-year yield may launch an all-out attack on the 5.30% high.
It is worth mentioning that in the opinion of some people, the current inflation trend is even quite similar to the situation at the end of 2021. At that time, price pressure proved to be continuous, laying the foundation for the Federal Reserve's hawkish interest rate hike. At first, however, central bank officials generally downplayed the impact of soaring inflation and thought it was temporary until a few months later, when they had to start the most aggressive cycle of interest rate hikes in decades.
Jim Reid, global head of economic and subject research at Deutsche Bank in London, said, “This is also obvious today. Investors are delaying possible interest rate cuts until later this year, and they expect future policy positions to be more hawkish.”
edit/lambor