US treasury bond bond yields rose again on Monday as investors were still weighing how to price bonds in the changing market dynamics. Although the escalation of the Palestinian-Israeli conflict over the past week has attracted many safe haven funds to flood the bond market, industry insiders are still whispering that the "selling storm" of US bonds that has lasted for several years has come to an end
Market data shows that US bond yields of various maturities rose on Monday, reversing the downward trend of last Friday once again. Among them, the two-year US Treasury yield increased by 4.2 basis points to 5.109%, the five-year US Treasury yield increased by 7.8 basis points to 4.722%, the 10-year US Treasury yield increased by 9.7 basis points to 4.713%, and the 30-year US Treasury yield increased by 9.9 basis points to 4.855%.
At present, the two-year US Treasury yield has exceeded the high recorded after the September CPI data that exceeded expectations last Thursday, and the 10-year US Treasury yield has returned to above the 4.7% threshold. While investors are currently paying attention to the situation in the Middle East, they are also trying to better measure the relationship between the Federal Reserve's efforts to curb high inflation and the recent rise in long-term bond maturity premiums.
Kevin Flanagan, Director of Fixed Income Strategy at WisdomTree, stated that with the increasing demand for funding from the US government, the significant increase in deficit spending has become a part of the new environment in the fixed income market and will not change in the foreseeable future.
He pointed out that "government spending has become deeply ingrained, and a trillion dollar deficit has become the norm for the next few years. Therefore, I believe that our current situation will not be reversed soon. If these factors are combined, it can explain why almost all maturities on the US Treasury curve will reach or may soon approach 5% yield
In terms of the geopolitical situation, diplomatic efforts aimed at reaching a ceasefire agreement and allowing aid to reach the besieged Gaza Strip did not achieve much on Monday. Israel ordered the evacuation of villages near the Lebanese border, raising concerns that the geopolitical conflict could spread to a new front. However, as Israeli ground forces have not yet officially launched a large-scale attack on Gaza, the market's risk aversion has not significantly increased at the beginning of this week. While bond yields have risen, US stocks also rebounded on Monday.
As of Monday's close, the Nasdaq Composite Index, which is concentrated in technology stocks, rebounded by 1.2% after falling 1.2% last Friday. The S&P 500 index rose 1.1%, while the Dow Jones index rose 314 points, or 0.9%.
Will Compernolle, macro strategist of FHN Financial, said that the increase in the supply of treasury bond bonds, the market's recognition that the Federal Reserve will maintain high interest rates for a longer period of time, and the good performance of the stock market all pushed up the yield of US bonds on Monday.
As the yield of US treasury bond bonds and the price of crude oil rise, many people in the Wall Street market expect more volatility in US stocks before the end of the year. The high inflation rate and the escalation of the Israeli-Palestinian conflict have strengthened this expectation. Richard Hunter, Market Director of Interactive Investor, said, "As uncertainty increases, investors tend to act cautiously
BlackRock: US long-term treasury bond bond yield may still have room to rise
It is worth mentioning that, according to a new report released by BlackRock Investment Research Institute on Monday, the yield of long-term US government bonds may still have room to rise, but with inflation easing and the Federal Reserve approaching the peak interest rate, two-way fluctuations may occur in the short term.
The research institute is a subsidiary of BlackRock, the world's largest asset management company. It said that in the next 6 to 12 months, its view of long-term treasury bond has changed from "reducing holdings" to "neutral".
The report pointed out that "in view of the market expectation that the policy interest rate will remain high in the longer term, we hold a tactical neutral view on the long-term US debt conversion, but still maintain a low allocation level strategically. The yield of the US 10-year treasury bond bond is at a 16 year high, which indicates that they have made many adjustments - but we believe that the process is not over."
The BlackRock Investment Research Institute also stated, "We currently believe that the likelihood of US bond yields fluctuating in either direction is similar, in other words, we believe there will be two-way fluctuations in the future
Since the Federal Reserve began to raise interest rates in March 2022 to cope with the soaring inflation, the yield of treasury bond bonds, which is inversely proportional to the price trend, has risen significantly. Long term bond yields have recently reached their highest level in 16 years due to the unexpected resilience of the US economy, raising industry expectations that interest rates will remain high for a longer period of time.
The BlackRock Investment Research Institute stated that since the first rate hike by the Federal Reserve in 2022, the repricing of Federal Reserve policy interest rates has been an important part of yield trends. We believe that the expected policy interest rates are approaching their peak, driving yields skyrocketing
In the long run, BlackRock Investment Research Institute is still not optimistic about long-term US bonds, as it expects investors holding long-term bonds to demand more compensation due to factors such as sustained inflation, rising fiscal deficits, and increased government bond issuance. The increase in term premium may be the next driving factor for the rise in yields. We believe that in the long run, the 10-year US Treasury yield may reach 5% or higher
The BlackRock Investment Research Institute also pointed out that at the current level of returns, the reason for the market's more bidirectional volatility and more volatility reflects "decision-makers turning to evaluate financial conditions", and "the further damage of interest rate hikes to the economy may become more apparent over time".