The US bond market will be in dire straits for most of 2023, and will finally recover its vitality towards the end of the year. At present, observers of the world's largest bond market are focusing on whether the bond market can truly embark on the path of recovery in the few remaining years of the year
Earlier this month, the Bloomberg US treasury bond composite index finally turned positive this year, because the signs of slowing inflation and the measured employment growth triggered a rebound, leading to the benchmark yield falling from its highest level in more than a decade. Although the market continued to experience ups and downs during this period, including a slight rebound in yields at the end of the Thanksgiving holiday week, the overall tone of the bond market was undoubtedly positive.
Most Wall Street strategists currently anticipate that the downward trend in US bond yields is expected to continue and lay the foundation for a widespread rise in 2024. Considering the large amount of bond issuance needed to fund the massive US deficit, long-term interest rates will gradually decrease.
Of course, many market experts predicted at the beginning of the year that 2023 would be a big year for the bond market, but so far these predictions have not been realized, causing them to face crazy criticism. But this time, there are indeed many supporting factors that seem to help them prove their bullish views.
The most significant change is that high inflation in the United States is continuing to subside, and the labor market is gradually cooling down. The once ruthless bearish commodity trading advisor (CTA) - who has won the bet on rising yields over the past year - is slowly withdrawing from the bearish bet.
All of this is happening against the backdrop of rising investor sentiment, who believe that the Federal Reserve's most aggressive rate hike cycle in decades has come to an end, and some even expect the Fed to cut rates as early as the first half of 2024.
Ashish Shah, Chief Investment Officer for Public Investment at Goldman Sachs Asset Management, said, "I don't think the Federal Reserve will turn quickly, but this will indeed be the direction forward. This is because you can see inflation falling and economic growth slowing down. Next year will be a bond year, and bonds will perform well. You will also see the yield curve steeper because there will be a lot of borrowing happening."
At present, the yield of benchmark 10-year treasury bond has dropped more than 50 basis points after hitting a 16 year high of 5.02% on October 23, and hovered around 4.47% at the latest. The two-year US Treasury yield has also fallen to 4.95%, far from the current cycle high of 5.26% hit last month.
Focus this week
Looking ahead to this week, after the end of the Thanksgiving holiday, there are clearly many major news events in the US market.
The US Bureau of Economic Analysis will release the revised annualized growth rate of gross domestic product (GDP) for the third quarter on Wednesday. Industry insiders have stated that if the economic growth rate in the third quarter drops significantly from the initial 4.9%, it may put pressure on the US dollar and bond yields.
This Thursday, the US government will also release personal consumption expenditure (PCE) price data for October, from which traders will obtain important information about price pressures. Currently, the industry expects the PCE price index in the United States to rise by 3.1% year-on-year in October. The core indicators - excluding food and fuel - are considered better indicators of potential inflation and are expected to rise by 3.5%.
In addition, several Federal Reserve officials will give speeches in the coming week, including Federal Reserve Chairman Powell, who will make his final appearance on Friday. This will be the last opportunity for Federal Reserve officials to make public comments before entering the silence period of the December interest rate meeting this weekend.
At that time, Federal Reserve officials may indicate that further interest rate hikes are still a type of option, as recent interest rate declines and the rebound of risky assets have to some extent eased the tension in the financial environment - which goes against the Federal Reserve's efforts to curb demand.
FXStreet analyst Eren Sengezer pointed out that if Federal Reserve policymakers suppress market expectations and try to persuade participants that they will not consider lowering interest rates for an extended period of time, the US dollar may find a foothold.
Brian Smedley, Chief Investment Officer of Cynosure Group, pointed out that although the high US bond yields last month may mark the current peak, there may be more turbulence in the bond market in the future. This is because as the economy will only slow down further in the coming months, central bank governors cannot quickly signal a shift towards easing.
"The Federal Reserve is likely to say, 'Don't be too excited about interest rate cuts for now,' as this is a game they may play for a while in the future," Smedley said in a telephone interview.
JPMorgan strategists believe that the best opportunities for shorter term bonds in the future are partly due to their expectation that the Federal Reserve will continue to shrink its balance sheet as part of quantitative tightening policies, even when interest rate cuts begin in the second half of 2024. This will put upward pressure on the term premium. They recommend customers to buy two to five year treasury bond, which is the best way to profit in this environment.
Ella Hoxha, head of fixed income at Newton Investment Management, also stated, "The cost of additional supply and fiscal deficits must be evident somewhere to attract bond buyers to buy. Therefore, we tend to bet on a steepening curve."