After a brief rebound on Monday, US bond yields of various maturities fell back on Tuesday, returning to the rare sharp decline seen last week. The demand for the US $48 billion three-year treasury bond bonds auctioned by the US Treasury Department on the same day was generally good, which to some extent offset the influence of the hawkish comments of the Federal Reserve. It is worth mentioning that according to industry insiders' statistics, the current round of major rebound in the bond market can be considered the seventh time Wall Street has bet on the Fed's "dove turn" in two years. As for whether it can happen, everyone is currently waiting to see.
Market data shows that the yield of US Treasury bonds of all maturities fell across the board on Tuesday, with the two-year yield falling 2.1 basis points to 4.926%, the five-year yield falling 5.5 basis points to 4.543%, the 10-year yield falling 7.8 basis points to 4.574%, and the 30-year yield falling 8.4 basis points to 4.73%.
The rebound in long-term bond prices is significantly greater overnight. This is the decline of the yield of the 10-year treasury bond in five of the past six trading days, and the decline of the yield of the 30-year treasury bond in four of the past five trading days.
Analysts say that in the so-called "bull market flattening" phenomenon (usually before the Federal Reserve cuts interest rates), the decline in long-term bond yields is much more severe than the decline in short-term yields. A bull market flattening out, or a yield curve like Tuesday further inverted, usually reflects a decrease in inflation expectations.
The yield curve of two-year/10-year treasury bond finally inverted about 34.5 basis points on Tuesday. After several weeks of steepening, the inverted range on Tuesday was further deepened.
Against the backdrop of another decline in US bond yields, US stocks also performed strongly overnight. The S&P 500 index has now risen for the seventh consecutive trading day, marking its longest consecutive rise in two years. The Nasdaq Composite Index has risen for the eighth consecutive trading day, with technology stocks representing the index, which has accumulated a 30% increase this year.
The US Treasury Department's auction of US $48 billion three-year treasury bond on Tuesday was generally good - the winning interest rate was 4.701%, and the last auction of three-year treasury bond in October was 4.740%; The bidding multiple is 2.67 times, higher than the previous 2.56 times and only slightly lower than the average level of 2.69 times. After the auction results were released, the yield of US three-year treasury bond bonds fell 4.9 basis points to 4.678%.
Wall Street is betting on the Fed's "dove turn" for the seventh time in two years
According to Henry Allen, a macro strategist at Deutsche Bank, the bond market has been betting on the Fed's "dove turn" for the seventh time since the Federal Reserve and other central banks began this tightening cycle. If this turn can be successful, there is still a question mark to be placed.
After the Federal Reserve's interest rate meeting last week, the 10-year US Treasury yield fell by over 30 basis points in a short period of time. Federal Reserve Chairman Jim Powell hinted at the meeting that the current interest rate hike cycle may be coming to an end. The subsequent signs of weakness in US non farm employment data last Friday also further boosted optimism.
The market currently expects the Federal Reserve to cut interest rates by nearly 100 basis points next year, while in contrast, Federal Reserve officials only expected a 50 basis point cut in 2024 in the September chart.
Allen wrote in a report released on Monday that this is at least the seventh expected increase in the shift of central bank doves in this cycle. But the problem is, "Expectations of a turn actually reduce the likelihood of a turn truly occurring, as this will alleviate financial conditions and make the central bank feel the need to tighten monetary policy again to reduce inflation
Allen emphasized that "last week, the 10-year real yield experienced the largest weekly decline so far in the year, and this change in economic sensitive interest rates may unintentionally increase the possibility of the Federal Reserve raising interest rates
According to Allen's statistics, the last time traders bet that the Federal Reserve would shift in the current cycle before this month was in March of this year, when the failures of several regional US banks prompted market expectations that the Federal Reserve would begin a significant interest rate cut later this year. At that time, the yield of two-year US treasury bond fell to a low of 3.55%, and the yield of 10-year US treasury bond fell to about 3.25%. However, the Federal Reserve did not truly change its stance on interest rate hikes thereafter, only creating a rescue tool for banks to contain financial turmoil, while policymakers continued to tighten monetary policy.
In addition to the banking crisis in March, the other five market 'dove turn' cases reported by Deutsche Bank are:
Late September/early October 2022: Cross asset selling centered around market turbulence in the UK;
July 2022: Concerns about global economic recession and weaker than expected US inflation data;
May 2022: Increased concerns about global growth risks;
Late February/early March 2022: the Russia-Ukraine conflict breaks out;
November 2021: The appearance of COVID-19 Omikjon variant made traders postpone the expected time of the first interest rate increase.
So, can this dove turn come true?
Allen wrote that although recent US data has "added signals that the economy is at the end of the cycle," "at least for now, historically, it is still too early to cut interest rates, especially with inflation still far above the central bank's target.
However, Allen also opened the door to potentially different ideas this time, writing, "History tells us that when this turn occurs, it may suddenly occur, and further increases in unemployment or another negative impact may become a catalyst for this situation to occur.