With the continuous cooling of expectations for the Federal Reserve's interest rate cut, and even whether to lower it within the year, it has become a hot topic of discussion, and US bond traders seem to have started preparing for a comprehensive 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 concerned about the prospect of a rebound in US inflation, and multiple maturities of US Treasury yields continue to rise. Among them, the yield of the 2-year US Treasury bond briefly crossed the 5% mark in overnight trading, marking the first time since November last year. It only returned to a slight decline in late trading and ultimately fell 0.8 basis points to 4.976% throughout the day.
In terms of other term yields, as of the end of the New York session, the 5-year US Treasury yield rose 3.1 basis points to 4.643%, the 10-year US Treasury yield rose 4.5 basis points to 4.596%, and the 30-year US Treasury yield rose 5.1 basis points to 4.683%.
Many analysts say that the US Treasury yield surged on Wednesday due to higher than expected US CPI data, which has raised doubts about whether the Federal Reserve can cut interest rates this year. The selling pressure in 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 such a big shock. We are still doing some closing work on Thursday, and there are also some sellers who woke up later selling."
The latest data released on Thursday showed that the Producer Price Index (PPI) in the United States rose 0.2% month on month in March, lower than the expected 0.3%. However, at the same time, another labor market data remains hot, with the US initial jobless claims falling more than expected last week, indicating that the labor market is still quite tight. The impact of two sets of data on the US bond market has been offset.
Michael Reynolds, Vice President of Investment Strategy at Glenmede, said, "Wednesday's CPI is the real big event. We believe that the first rate cut in September is most likely, but this means you must see inflation fall, which we haven't seen this year yet."
After the unexpected CPI data was released on Wednesday, traders have lowered their expectations for the number of rate cuts by the Federal Reserve this year to less than two, significantly lower than the three times the Federal Reserve predicted in last month's chart. On Thursday, the federal funds rate futures market expected a cumulative rate cut of about 43 basis points this year.
The US Treasury Department also auctioned US $22 billion of 30-year treasury bond on Thursday, with the winning interest rate of 4.671%, about 1 basis point higher than the yield of 30-year treasury bond in the secondary market at the bidding deadline, which indicates that investors are willing to buy new bonds only after asking for a premium.
Is it feared that US debt will fully return to the "5 eras"?
In fact, except for the 2-year US Treasury bonds that briefly crossed the 5% threshold overnight, the yields of 1-year and shorter term US treasury bond themselves are still in the high yield environment of the "5-era". At present, many insiders are focusing on whether the 10-year treasury bond, known as the "anchor of global asset pricing", will follow suit.
As the scenario of the Federal Reserve not cutting interest rates this year seems to be intensifying, some bond traders are already preparing for 10-year Treasury yields exceeding 5%. For example, Schroder is short selling some maturity US bonds, believing that stubborn inflation exacerbates the risk of interest rates remaining high for a longer period of time.
"I don't think it's impossible for the 10-year US Treasury yield to reach 5% or higher," said Kelly Wood, Deputy Director of Fixed Income at Schroder in Sydney
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. Schroeder currently holds short positions in US two-year, five-year and 10-year treasury bond bonds.
Pimco also predicts that the Federal Reserve will relax policies at a more gradual pace than other developed market central banks this year, and the possibility of not cutting interest rates at all this year cannot be ignored.
Ben Emons, Senior Portfolio Manager at Newedge Wealth, said when discussing whether there is a risk of not lowering interest rates in the United States this year, "this is a possible option," adding that as the market focuses on new inflation risks, the 10-year yield may launch a comprehensive attack towards a high of 5.30%.
It is worth mentioning that in the eyes of some, the current inflation trend is even quite similar to the situation at the end of 2021, when price pressures were proven to be sustained, laying the foundation for the hawkish interest rate hikes by the Federal Reserve. But initially, central bank officials generally downplayed the impact of soaring inflation and believed it was temporary, until a few months later they had to embark on the most aggressive rate hike cycle in decades.
Jim Reid, Global Head of Economic and Thematic Research at Deutsche Bank in London, said, "This is also evident today, as investors are postponing possible interest rate cuts to later this year and anticipate a more hawkish policy stance in the future."