(Bloomberg) — Bond investors are speculating that the unprecedented decline in U.S. Treasuries could soon come to an end.Thank you for reading this post, don't forget to subscribe!
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US 10-year yields dropped by the largest margin since March following dovish remarks from Federal Reserve officials, sparking speculation of potential interest rate hikes, while concerns over an Israel-Hamas war limited Demand. The movement was more significant than usual as cash Treasuries were traded globally due to the US holiday on Monday.
Speaking on Monday, two Fed officials expressed the belief that the recent surge in US yields may have contributed to strengthening financial conditions for them.
“Fed speakers believe that higher bond yields and tighter financial conditions will influence their perspective on the fed funds rate,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “Market pricing indicates that the Fed will not implement any rate hikes this year,” he added, suggesting that there is still a possibility of a final “insurance” hike occurring.
Fed Vice Chairman Philip Jefferson stated that he sees an increase in Treasury yields potentially restraining the economy further, even though inflation rates remain considerably high. Fellow policymaker Laurie Logan said that the recent rise in long-term yields could indicate less necessity for the central bank to raise rates once again.
Meeting-dated swaps currently show about a 65% likelihood of the Fed remaining unchanged in December, compared to a 60% likelihood just a week ago for another hike. They are even more confident that policymakers will not increase rates in any subsequent session until mid-2024.
US 10-year yields plummeted by 18 basis points to 4.62%, marking the most significant one-day decline since March 22. Two-year yields fell by 16 basis points to 4.92%.
In addition to Treasuries, bonds in other markets experienced a rise. Australian 10-year yields declined by nine basis points, while Japanese bonds decreased by 3.5 basis points, on track for their most substantial decline in two months. The dollar weakened against the majority of its Group-of-10 counterparts as a result of the decline in Treasury yields, which bolstered Asian shares.
What Bloomberg strategists are saying…
“The sentiment at the Federal Reserve’s November meeting is likely to be negative, as it will serve as a reminder to investors that interest rate cuts are currently not being considered.”
Mark Cranfield, MLIV Strategist
“Swift events in the Middle East and the recent bond sell-off have driven long-term yields to their highest levels in decades, causing policymakers to expect a hike,” wrote Althea Spinozzi, senior fixed-income strategist at Saxo Bank A/S. “However, they will be hesitant to do so.” in a research note.
Bond investors’ hopes for an end to rate hikes have already been shattered. A rally, prompted by the banking crisis, which led to 10-year yields dropping to 3.25% in April, was followed by a wave of selling as the Fed persisted with tightening policies.
Treasury yields have risen in recent months due to concerns that persistent inflation will convince the Fed to maintain high borrowing costs for a longer duration. The US government debt index has dropped by 2.6% this year, on track for its third consecutive year of losses.
The Fed’s rate hikes have thus far been unable to push inflation back to its 2% target, while the US economy continues to exhibit resilience. Yields have also risen this year due to concerns about Treasury issuance required to fund the growing government deficit.
“The recent increase in yields may give the Fed additional motive to hold rates steady in the short term, but it is too early to justify it as the end of the economic cycle,” stated Robert Thompson, macro rates strategist at the Royal Bank of Canada in Sydney.
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