In the last trading day before the Thanksgiving holiday in the United States, the three major stock indexes further strengthened, and the yields of US bonds of different maturities fluctuated. The multiple sets of US economic data released on Wednesday were mixed overall, but with increasing expectations that the Federal Reserve's interest rates have reached their peak, interest in risky assets has also continued to rise recently.
Market data shows that the S&P 500 index rose 0.4% on Wednesday. So far in November, the S&P 500 index has risen by 8.7%, and is expected to achieve its largest monthly increase since July 2022. The index has risen 19% since 2023. The stock market reversed the trend of falling for the third consecutive month in October. One of the key factors is that the yield of treasury bond bonds has fallen from the high point a few weeks ago.
The overall overnight rise and fall in US bond yields across different maturities varied, with little fluctuation compared to the previous day's closing. Among them, the two-year US Treasury yield increased by 2.7 basis points to 4.91%, the five-year US Treasury yield increased by 2.9 basis points to 4.436%, the 10-year US Treasury yield increased by 1.4 basis points to 4.41%, and the 30-year US Treasury yield decreased by 1 basis point to 4.541%.
Given that the overall market trading during Thanksgiving week was relatively light, there was no clear direction for Wednesday's volatility in the US bond market. It is expected that trading activity on Friday may continue to be suppressed due to the lack of major US economic data after the end of the Thanksgiving holiday on Thursday.
According to data released by the US Department of Labor on Wednesday, the number of initial claims for unemployment benefits in the week ending November 18th recorded 209000, lower than expected 228000, and also hit a new low since the week ending October 14th.
Nancy Vanden Houten, Chief US Economist at the Oxford Institute of Economics, said: "We are entering this specific period of the year - seasonal noise will make unemployment benefit data more difficult to interpret. However, to put it mildly, the number of initial claims for unemployment benefits is still at a level consistent with relatively low levels of layoffs
She added, "Setting aside seasonal noise, we believe that the initial data is consistent with the cooling level of the job market, which is enough to exclude interest rate hikes from the table. However, the job market is still too strong to consider interest rate cuts in the short term
Several other data released on the same day showed that durable goods orders in the United States decreased by 5.4% month on month in October, marking the largest decline since April 2020. The estimated decrease is 3.2%, compared to an increase of 4.6%. Analysts pointed out that due to a decrease in commercial aircraft bookings and weakened demand for commercial equipment, durable goods orders in the United States fell more than expected in October, indicating that factory production will struggle to gain momentum.
The University of Michigan Consumer Confidence Index slightly increased to 61.3 in November from 60.4 at the beginning of the month. Consumer confidence surveys reveal consumers' views on their own financial situation and the overall economy. At the same time, the one-year expected inflation rate of consumers in the United States in November was revised up to 4.5%, the highest level in seven months, significantly higher than the range of 2.3% -3.0% in the two years before the COVID-19 pandemic. The market originally thought that it would remain at 4.4%.
Investors buy corporate bond funds on a large scale
It is worth mentioning that according to data from fund flow tracking agency EPFR, investors are currently buying US corporate bond funds at the fastest pace in more than three years. As of the 20th of this month, over $16 billion has flowed into corporate bond funds, with net inflows exceeding any full month since July 2020.
This trend is mainly focused on junk bonds - $11.4 billion has flowed into these funds investing in low rated, high yield bonds this month. Another $5 billion has been invested in investment grade bond funds.
Analysts point out that a large influx of funds highlights the increasing interest of investors in risky assets as the market judges that interest rates have reached their peak. The signs of inflation cooling in recent months have fueled predictions that the Federal Reserve has completed this rate hike cycle. At the same time, the high demand for lower rated bonds reflects increasing confidence that taking a break from the pressure of high borrowing costs will enable heavily indebted companies to cope with an economic slowdown without a surge in defaults.
Will Smith, head of American high-yield credit at Alliance Bernstein, said, "We have seen a huge change in the sentiment of the whole market. With investors competing to clear the bets on short bonds, the large-scale rebound of US treasury bond bonds after the release of pressure has been responded to in the corporate debt sector."
Since March last year, the Federal Reserve's aggressive tightening of monetary policy has raised the target range of the federal funds rate by a cumulative 525 basis points. This has brought a greater interest burden to American companies, raising concerns that companies with higher risks of difficulty in debt repayment may experience a wave of defaults. However, the Federal Reserve has held two consecutive interest rate meetings since July to stabilize interest rates, while employment and inflation data have also shown signs of interest rate cuts, which has significantly increased market expectations for interest rate cuts.
From the perspective of futures market pricing, the market currently expects the Federal Reserve to cut interest rates twice before July next year, with a potential annual rate cut of nearly 100 basis points.
The shift in interest rate prospects has also pushed up the valuation of corporate bonds. According to ICE BofA, the average premium paid by US investment grade borrowers relative to US treasury bond is 1.17 percentage points, lower than 1.3 percentage points on November 1. The average interest rate spread of junk bonds has decreased even more, from 4.47 percentage points to 3.95 percentage points.
Of course, there are still some industry insiders who have doubts about high-risk corporate bonds. Apollo Chief Economist Torsten Slok stated that in the scenario of interest rates being "higher and longer", the companies with the lowest ratings in high-yield bonds will be the most vulnerable. Their leverage ratio is higher, coverage is lower, and cash flow is weaker, which means that default rates may continue to rise.
Slok added that the capital inflows in November indicate that the pendulum is definitely swinging in the direction of 'hey, inflation is over, everything is fine'. The problem is that if a well-known company defaults on its debts, the pendulum may swing very quickly in the other direction.