The US Treasury yield fell into a volatile consolidation on Tuesday, as the decline in gasoline and durable goods prices roughly offset the still hot cost growth in the service industry. The US inflation rate remained stable in November, but the mild rebound in overall and core CPI month on month data still led traders to slightly lower their bets on the Federal Reserve's significant easing of monetary policy next year.
Market data shows that the overall overnight rise and fall in US bond yields across different maturities varies. Among them, the 2-year US Treasury yield increased by 2.5 basis points to 4.741%, the 5-year US Treasury yield decreased by 2.6 basis points to 4.223%, the 10-year US Treasury yield decreased by 3.4 basis points to 4.203%, and the 30-year US Treasury yield decreased by 2 basis points to 4.309%.
According to data released by the US Department of Labor on Tuesday, the Consumer Price Index (CPI) rose 3.1% year-on-year in November, slightly slower than the 3.2% increase in October. Compared to last month, the index has increased by 0.1% month on month.
After excluding the volatile food and energy categories, the core CPI increased by 4% year-on-year in November, which is consistent with the growth rate in October, but still significantly higher than the Federal Reserve's long-term inflation target of 2%. Compared to last month, the core CPI increased by 0.3%, compared to a 0.2% increase in October.
Regarding this data performance, Phillip Neuhart, Wealth Management Market and Economic Research Director at First Citizen Bank, stated that "the overall year-on-year increase in CPI has slowed down, but the core inflation rate is still twice the Federal Reserve's target of 2%. The Federal Reserve may have to wait until the core inflation rate further falls before being willing to lower interest rates.".
From the perspective of pricing in the interest rate market, traders currently estimate that the Federal Reserve's interest rate cut in 2024 will be about 115 basis points, lower than the level before the data was released.
Industry insiders still expect the first interest rate cut to arrive in May next year, but the probability has decreased. According to the Federal Reserve observation tool of the Chicago Mercantile Exchange, the probability of a rate cut in May is currently set at around 75% in the interest rate futures market, compared to approximately 89% a week ago.
After the CPI data is released, the next focus for market participants will undoubtedly be tonight's Federal Reserve interest rate meeting. Matt Peron, Research Director and Global Solutions Director at Janus Henderson Investors, said, "The CPI report is consistent with expectations and is unlikely to change the direction of the market or the Federal Reserve. Although service prices remain stubborn, the overall situation is that inflation is slowly normalizing. And this is unlikely to make the Federal Reserve relax its struggle, so it may maintain a tough tone."
Olu Sonola, the head of regional economics at Fitch Ratings in the United States, pointed out that "the CPI data is unlikely to have any meaningful impact on Wednesday's decision to keep interest rates unchanged, but it should provide some ammunition for the Federal Reserve to reiterate that predictions for the earliest rate cut in March 2024 are still immature.".
Wall Street insiders worry that the rebound in US Treasury bonds will be difficult to sustain
It is worth mentioning that as the end of the year approaches, the recent wave of counterattacks on US Treasury bonds seems to have become too rapid, and many Wall Street insiders are also starting to worry whether the market has placed too much bets on the possibility of the Federal Reserve turning, which may actually endanger the trend of US Treasury bonds next year.
In a new survey, Praveen Korapaty, the chief interest rate strategist of Goldman Sachs Group, and Joseph Brusuelas, the chief economist of RSM, a tax consulting company, both predicted that the yield of the US 10-year treasury bond bond would rise to about 4.5% by the end of next year.
Scott Anderson from BMO Capital Markets predicts that by the end of 2024, the yield on 10-year US Treasury bonds will only be similar to the current level of about 4.2%.
These Wall Street insiders suggest that bond traders may be repeating the mistakes of the past two years: they underestimate economic resilience and the possibility of sustained inflationary pressures.
The US bond market recorded the largest monthly increase since the mid-1980s last month, while the yield fell sharply, because the market speculated that the Federal Reserve would cut interest rates from the first half of 2024, and it is expected to cut interest rates five times throughout the year. But Korapaty pointed out, "The expectation of policy relaxation digested by the market may be too much and too early."
BMO's Anderson said, "Due to economic adjustments raising so-called neutral interest rates, the low interest rates of the pre pandemic era are unlikely to return soon. This means that decision-makers need to maintain interest rates above past levels to avoid stimulating the economy. Our long-term forecast for the Federal Reserve over the next five years is that the federal funds rate will not soon return to pre pandemic levels."
A recent Reuters survey of bond strategists also showed that although the yield of US treasury bond bonds will continue to decline in the next year, the decline will be less than half of that in the past seven weeks, indicating that the market has almost fully prepared for the interest rate cut next year.
Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, said, "At the beginning of November, the market's expectation for a rate cut next year was 70 basis points, but now it is 120 basis points. Most of the yield declines we have seen recently are based on the early loading of these expectations."