With the 10-year US bond yield known as the "anchor of global asset pricing", this week it came back above the 4% threshold. More and more traders are now beginning to worry that the US treasury bond bond market will further reverse its gains earlier this year, because they expect the Federal Reserve to cut interest rates at a slower pace before the end of the year.
Market data shows that after several consecutive days of high yields, although there was a slight decline overnight, the benchmark 10-year US Treasury yield remained stable above the 4% mark, and even reached a 10 week high of 4.057% during trading.
Demand for the US $58 billion three-year treasury bond bonds auctioned by the US Treasury Department on the same day was also quite bleak. The winning yield of this auction was 3.878%, a new high since July, and 0.7 basis points higher than the pre issuance interest rate, which was the first time that the tail interest margin appeared in the auction of treasury bond of this term since June this year.
Meanwhile, the bidding multiple for this auction is only 2.45 times, the lowest level since June. Primary dealers with the obligation to purchase all failed bonds to prevent abortive auctions were allocated 19.2%, the highest proportion since June, reflecting the sluggish real demand.
The recently released economic data, especially last Friday's employment report, did not prove the rationality of this summer's rise in US Treasury bonds, "said Kevin Flanagan, fixed income strategy director at WisdomTree in New York.
There is no doubt that the rapid cooling of the market's expectation of the Federal Reserve's interest rate cut recently has poured cold water on the buying frenzy of the US treasury bond bond market under the five consecutive months of rising trend. The latest pricing in the interest rate swap market shows that the Federal Reserve's policy meeting on November 7th will only cut interest rates by about 21 basis points, and the remaining two meetings this year will cut interest rates by a total of about 50 basis points. Prior to the release of non farm payroll data last Friday, the expectation for a further interest rate cut before the end of the year was as high as about 66 basis points.
Patrick Armstrong, Chief Investment Officer of Plurimi Wealth, said, "The market's pricing for the Fed's interest rate cut was indeed somewhat ahead of schedule. I believe that inflation may become a problem again next year
On Tuesday, St. Louis Fed President Moses Lem also warned that further interest rate cuts should be gradual, while Atlanta Fed President Bostic stated that the Fed should continue to monitor inflation rates. Federal Reserve Governor Kugler warned that if the progress of a significant decline in inflation stagnates, it may be necessary to slow down the pace of interest rate cuts.
From the position data, since the strong performance of the September non farm payroll report released last Friday, interest rate market traders have abandoned long positions in multiple futures contracts linked to the guaranteed overnight funding rate (SOFR). This indicates that the bullish bet on a series of significant interest rate cuts this year and early 2025 has been lifted.
Data shows that since the release of the employment report, the open interest contracts of SOFR futures (i.e. the number of positions held by futures market traders) have sharply decreased. According to data released by the CME on Tuesday, the two-day open interest in contracts for December 2024 has decreased by approximately 223000 contracts, with a scale equivalent to a risk weight of approximately $5.6 million for every one basis point change. During this period, the contract experienced a significant sell-off, indicating that as traders reprice the Federal Reserve's policy path for this year, bullish bets have been smoothed out.
Citigroup strategist David Bieber wrote in a report on Tuesday that before the release of US CPI data this week, the market had a preference for new bearish risks.
The new short positions were formed ahead of the release of crucial US September CPI data on Thursday, which could further overturn traders' bets on the Federal Reserve's monetary easing policy. According to industry media surveys, although the market generally expects the overall CPI in the United States to further decline in September, the core CPI may remain strong. If the final data exceeds expectations, it may trigger a further shift in market positions towards short positions.
The long positions in the spot market are also disappearing. The latest treasury bond customer survey by JPMorgan Chase shows that last week, traders had their first net short position since April 2023, and the total short position reached the highest since February 2023.