The yield of US treasury bond bonds fell across the board on Tuesday. The yield of benchmark 10-year treasury bond fell further to a two month low, while the yield of short-term bonds hit a double-digit base point decline. Several Federal Reserve officials who delivered speeches on the same day spoke in a dovish tone, pushing for a sharp drop of about 15 basis points in the yield of the two-year US Treasury, which is most closely related to interest rate expectations.
As of the end of the overnight New York session, the 2-year US Treasury yield fell 15.4 basis points to 4.745%, the 3-year US Treasury yield fell 12 basis points to 4.489%, the 5-year US Treasury yield fell 13.4 basis points to 4.285%, the 10-year US Treasury yield fell 6.8 basis points to 4.326%, and the 30-year US Treasury yield fell 3.1 basis points to 4.509%.
Currently, the yield on 2-year US Treasury bonds has fallen to its lowest level since the end of July.
"The yield has been declining recently, and the overall trend of the yield has been declining in recent weeks. This is because investors are no longer too worried about the Federal Reserve raising interest rates, nor are they too worried about inflation rising again. Waller's remarks on Tuesday had a further impact," said Anthony Saglimbene, chief market expert at Ameriprise Financial.
As one of the most hawkish officials within the Federal Reserve, Waller said on Tuesday that he is encouraged by the recent slowdown in economic activity, as it may indicate that monetary policy has reached a sufficiently tight level.
During a written speech at an American Business Research event in Washington, Waller said, "I am increasingly convinced that policies are currently in the right position to drive economic growth to slow down and bring inflation back to 2%. What I have learned in the past few weeks is encouraging, and the pace of the economy is slowing down.".
Waller's latest speech echoes his statement last month. Of course, he also emphasized that inflation is still too high and he cannot fully believe that recent progress can be sustained. Waller also said that although the yield of long-term US treasury bond bonds has fallen since the last policy meeting of the Federal Reserve, it is still higher than the level before the middle of the year, and the overall financial environment is still tight.
On Tuesday, another Federal Reserve director, Bauman, stated that there is still a lot of uncertainty about how the policy will proceed. She pointed out at an event in Salt Lake City, Utah that she still believes that further policy tightening is needed to bring inflation back to the Federal Reserve's target, but compared to her previous statements, Bauman has now set more prerequisites for raising interest rates.
Overall, even the most hawkish officials within the Federal Reserve seem to have shown a general reluctance to support a rate hike in December, which undoubtedly indicates that the last rate hike of the year hidden in the Fed's September chart may have been "stillborn". This Friday, Federal Reserve Chairman Powell will also deliver his final speech before the silence period of next month's meeting, which is worth investors continuing to pay attention to.
According to the Federal Reserve observation tool of the Chicago Mercantile Exchange, traders currently expect the probability of the Federal Reserve remaining stagnant in December to reach a high of 96%, while the expectation of a rate cut in March next year is close to 40%.
Bets on interest rate cuts are ubiquitous in the interest rate market?
It is worth mentioning that recent signs in multiple fields indicate that bets on the Federal Reserve's aggressive easing policy next year are rapidly spreading in the US interest rate market.
In the spot bond market, JPMorgan Chase has conducted weekly surveys of treasury bond bond customers since 1991, and found that the most active investors in the market are bullish on the bond market at the highest rate ever recorded.
In the week ending Monday, the net long position of active clients increased to 78%, setting a record high since 1991 in surveys. Among all surveyed clients, the net long position also increased, reaching its highest value since November 2010.
The option structure in short-term interest rate options (whose prices are linked to the SOFR rate) that can benefit from multiple interest rate cuts by the Federal Reserve before mid next year has been favored recently.
On Monday, at least one options market trader was deploying for the Federal Reserve to cut interest rates by up to 250 basis points next year. If the Federal Reserve lowers its benchmark interest rate to around 3% by September next year, the above bets made with reference secured overnight financing rate (SOFR) options will begin to yield returns. The premium for the bet is approximately $13 million, and option scenario analysis shows that if SOFR drops to 2%, the related bet will be profitable by $200 million.
Although few people believe that this bet will be successful, this transaction demonstrates the increasing activity of SOFR derivatives trading, which is closely related to market expectations for future central bank policies. Although some previous trades of the same type have been closed, traders are now pushing their pigeon turning bets towards next year.
In addition, the latest futures position data released by the US Commodity Futures Trading Commission (CFTC) on Monday also showed that hedge funds increased their net long positions in SOFR futures to a record high last week.