As market traders have made full preparations for the first interest rate cut by the Federal Reserve since 2020 in the past few months, the US treasury bond bond market is expected to have the best market performance in three years.
The Bloomberg treasury bond Total Return Index shows that as of August 28, the return rate of the index in this month has reached 1.7%, which is expected to rise for the fourth consecutive month. As investors' confidence in the decline of US borrowing costs increases, the index has continued to climb since the end of April, and the increase since the beginning of this year has also expanded to over 3%.
After being under pressure earlier this year, the recent rebound in the US Treasury market is undoubtedly evident. This is mainly due to recent signs of inflation and job cooling in the macro sector of the United States, which has raised the possibility of the Federal Reserve lowering interest rates from their highest level in over 20 years this autumn.
In early August, when the non farm payroll report showed that the unemployment rate exceeded expectations and rose to 4.3%, the 10-year US yield, known as the "anchor of global asset pricing," once hit a 14 month low of 3.67%. As of the end of Thursday's New York session, this benchmark yield had recently traded around 3.86%.
Tiffany Wilding, an economist at PIMCO, said that the bond market remains an attractive place. Although there has been a recent rebound, we still expect it to have more upside potential
At last week's Jackson Hole Global Central Bank Annual Meeting, Federal Reserve Chairman Powell stated that "the time has come to adjust policies," marking a critical turning point in the Fed's two-year battle against inflation. Since July 2023, the Federal Reserve has maintained the benchmark interest rate in the high range of 5.25% -5.5% - the highest level in over 20 years.
Bond traders are currently pricing the Fed's rate cut for the year at around 100 basis points, which means there will be rate cuts at the remaining three policy meetings at the end of the year, including a significant 50 basis point cut.
Short term bonds, which are more sensitive to changes in Federal Reserve policy, have performed particularly well this month, putting a key part of the yield curve on the brink of becoming positive for the first time since July 2022- the two-year Treasury yield is currently less than 2 basis points higher than the 10-year Treasury yield. In March 2023, this gap exceeded 100 basis points, the largest inversion since 1981.
However, the continuous rise in bond prices has also raised concerns among some whether this rebound has gone too far. Looking ahead to the future, the main risk facing the bulls in the bond market is whether the US labor market will stabilize, leading to a slower pace of interest rate cuts by the Federal Reserve than currently expected.
On Thursday, the revised value of the US second quarter gross domestic product (GDP) and initial jobless claims data showed that the US economy still has resilience, which has driven down US Treasury bonds and increased yields.
I was surprised by the significant shift in market sentiment, "said Meghan Swinber, a US interest rate strategist at Bank of America." However, the data so far has not fully proven that the statement 'the Federal Reserve will quickly and actively cut interest rates this year' is correct
On the last day of this month, the Federal Reserve will release its most favored inflation indicator, the July PCE Price Index, at 20:30 Beijing time tonight, which is worth investors' continued attention.
According to FactSet's general expectation, economists believe that the overall PCE price index will rise by 0.2% month on month and 2.6% year-on-year in July. The core PCE index, excluding volatile food and energy prices, will increase by 0.2% month on month and 2.7% year-on-year.
Most of these predicted values will be slightly higher than the PCE data in June. Bank of America analysts predict that the actual performance of the final data may be roughly consistent with general expectations, and attribute the slight year-on-year rebound in inflation to the base effect.
Overall, PCE inflation data should still strengthen the Federal Reserve's confidence in the inflation outlook, leading to policy easing in September, "wrote Bank of America analysts.
Atlanta Fed's Bostic said on Thursday that the US inflation rate has dropped significantly from its peak in 2022, but there is still a big gap between recent data and the central bank's 2% target. He said, 'In order to bring inflation back to the target, I have been highly focused on the short term.'. Just a day ago, the Atlanta Fed chairman reiterated that he had advanced his expectations for the timing of interest rate cuts. However, he added that he would rather wait for more data to confirm the economic trend than cut interest rates too early and then have to raise interest rates again when inflation accelerates again.