The yield of US treasury bond bonds further weakened on Wednesday, and the yield of benchmark 10-year US treasury bonds fell for the third consecutive trading day, because the revised US GDP data still failed to overturn the market's expectation of the Fed's interest rate cut.
Many industry insiders have expressed that the US bond market may experience a comprehensive recovery, and there is even a possibility of a "debt bull awakening". With only the last trading day left this month, the 10-year US Treasury yield is expected to record its largest monthly decline since December 2008.
Market data shows that the yield of US bonds with different maturities fell overnight, and due to the reverse relationship between bond yields and prices, this means that the price of US bonds rose overnight. Among them, the 2-year US Treasury yield fell 8.7 basis points to 4.656%, the 3-year US Treasury yield fell 8.3 basis points to 4.405%, the 5-year US Treasury yield fell 6.4 basis points to 4.216%, the 10-year US Treasury yield fell 6.4 basis points to 4.26%, and the 30-year US Treasury yield fell 6.9 basis points to 4.439%.
As shown in the figure below, the 2-year US Treasury yield, which is most closely related to the Federal Reserve's interest rate expectations, has now fallen to its lowest level since June.
The report released by the US Department of Commerce on Wednesday showed that the revised gross domestic product (GDP) for the third quarter was a year-on-year increase of 5.2%, higher than the initial estimate of 4.9% and also higher than the 5% forecast by economists surveyed by Dow Jones. The main reason for the increase in GDP data is the increase in non residential fixed investment, including structure, equipment, and intellectual property.
However, this overall hot third quarter GDP data has not dispelled market speculation that the Federal Reserve has ended its current tightening cycle and will start a rate cut cycle in the first half of next year. The sub data in the GDP report also showed a decrease in consumer spending in the third quarter, with the index only increasing by 3.6% in this report, compared to an initial estimate of 4%.
LPL Financial strategist Jeffrey Roach said, "A series of evidence suggests that the Federal Reserve is getting what it wants - the economy is experiencing a painless and moderate slowdown. As price pressures may further ease in the coming months, the market can reasonably expect the Federal Reserve to stabilize interest rates until mid next year, when the Fed may moderately cut rates."
The interest rate swap contract shows that the market's probability expectation for the Federal Reserve to cut interest rates by 25 basis points until May 2024 has reached 100% on Wednesday, indicating that people have completely moved their bets on the timing of the first rate cut from June next year to May.
"The Federal Reserve is creating more possibilities for loose policy," said Gregory Faranello, head of US interest rate trading and strategy at AmeriVet Securities in New York
Due to industry insiders speculating that the Federal Reserve has ended its aggressive interest rate hike cycle this week, the global bond market has recently continued its upward trend since November. A set of data shows that the Bloomberg Global Bond Composite Index (which covers sovereign and corporate bonds) has achieved a return of about 5% this month, expected to achieve its best performance since the December 2008 financial crisis - when the Federal Reserve lowered interest rates to zero and promised to increase lending to the financial industry after the collapse of Lehman Brothers.
The dovish shift expected by the central bank is also a positive factor for corporate bonds. The relevant index shows that the spread of investment grade global corporate bonds is hovering around the lowest level since April 2022. Over the past month, with increasing optimism in the market for a soft landing of the US economy, investors have rushed to purchase these securities, narrowing the interest rate spread.
Andrew Brenner from NatAlliance Securities said, "If more people start to believe that the Federal Reserve has completed its tasks and are paying attention to the next step in interest rate measures - lowering interest rates, then there is enough firepower to lower interest rate yields. However, we have taken many detours in the short term."
Analysts at Bank of America predicted on Wednesday that as the Federal Reserve starts cutting interest rates next year, the yield curves depicting different government bond maturities may steep in 2024.
Mark Cabana, head of US interest rate strategy at Bank of America (BofA), said at a media briefing that it is expected that by the end of next year, the yield of US benchmark 10-year treasury bond bonds will fall back to 4.25%. Comparing the yield curve of two-year and 10-year US treasury bond bonds, it is expected that the upside down will turn positive next year, and the interest margin is expected to reach+25 basis points by the end of next year.
Earlier this week, Ashish Shah, investment officer at Goldman Sachs Asset Management, also stated, "I don't think the Federal Reserve will turn quickly, but this will be the direction forward because you will see a decrease in inflation and a slowdown in growth. (Next year) will be a bond year, and they will perform well. You will also see a steeper yield curve because there will be a lot of borrowing."
Looking ahead to the day, many Wall Street professionals are also preparing for the Federal Reserve's release of the PCE price index on Thursday - which many believe is the most important economic indicator of the week.
Jim Solloway, Chief Market Strategist at asset management giant SEI, stated that, Although no month's data will completely influence the Federal Reserve's decisions, if the data results are weak and the unemployment rate further rises to above 4%, it will definitely make the committee more inclined towards the dovish side. However, our best prediction is still that the Federal Reserve will maintain policy interest rates at the current level in the first half of next year. We believe that the Federal Reserve's interest rate cuts in 2024 will not be as significant as the market recently anticipated