Although several Federal Reserve officials have attempted to ease market expectations for interest rate cuts, driving a slight rebound in US bond yields across different maturities overnight, these "minor episodes" are clearly no longer enough to conceal the bullish sentiment currently emerging in the US bond market. After the Federal Reserve Chairman Powell showed an obvious willingness to consider cutting interest rates last week, many bond market investors have completely put their minds down. A tool to track long-term U.S. treasury bond bonds has also recently soared, announcing that it is the first to enter the bull market.
As a popular tool for betting on long-term bonds, the iShares ASUS 20-year and above US Treasury ETF hit 99.35 on Friday - up 21% from the 16 year low hit on October 23, officially entering the technical bull market area described by traders.
Although many investors still focus on short-term bonds as safer bets in the face of uncertain monetary policy prospects, the potential for a significant increase in long-term bonds is attracting strong interest from more and more market participants. The ETF received $1.3 billion in new funds last Friday, the largest inflow in nearly five months.
Kellie Wood, Deputy Head of Fixed Income at Schroder in Sydney, said, "This is entirely due to fear of going out of thin air. After seeing years of negative returns, retail investors have been waiting for more positive returns before allocating fixed income assets."
At present, bond market traders are working hard to digest the aggressive rate cut schedule, and they expect the Federal Reserve to cut interest rates for the first time in March, with a 141 basis point cut by December 2024.
Federal Reserve Chairman Powell stated at the end of last Wednesday's Federal Reserve meeting that as inflation declines faster than expected, the Fed's monetary tightening policy is likely to have come to an end, and discussions about cutting borrowing costs are "entering the picture", leading to a continuous decline in yields thereafter.
Although since then, some Federal Reserve officials, including New York Fed Chairman Williams and Chicago Fed Chairman Goolsby, have attempted to cool people's high expectations of interest rate cuts with their speeches, their overall influence has been limited. In the US stock market, both the Dow and Nasdaq have recorded their eighth consecutive day of gains.
"I'm not surprised that the Federal Reserve wants to have more control over the situation," said Jonathan Duensing, head of fixed income at Amundi US. "This is a challenge for them because Powell's statement is very dovish. Obviously, for Federal Reserve decision-makers, it's a bit difficult to retract information, and if Powell doesn't say something, the market will understand the Fed's statement literally."
According to the schedule, the US Treasury Department will sell US $13 billion of 20-year treasury bond bonds on Wednesday and US $20 billion of five-year inflation protected bonds (TIPS) on Thursday. The main focus of the US economy this week will be the Personal Consumption Expenditure (PCE) Price Index data released on Friday.
The premium on 10-year US Treasury bonds has dropped to the lowest level in three months
It is worth mentioning that while long-term bond yields have fallen significantly in recent times, the US bond maturity premium, which measures the compensation required for investors holding long-term bonds, has also dropped to the lowest level in three months. During the peak period of panic in the bond market this autumn, the rise in term premiums was once the most concerning area for bond bulls.
At that time, the term premium skyrocketed due to concerns about rising fiscal deficits and increased government bond issuance, which helped push up long-term US bond yields that were opposite to price trends.
But as market expectations of the Fed's rate hike cycle peaking and the US Treasury Department announcing a more moderate year-end issuance plan, last month's term premium returned to the negative range. Last Thursday, the term premium of the benchmark 10-year US Treasury yield fell to its lowest level since September 20th.
The US Treasury Department announced last month that it will slow down the growth rate of longer-term bond auctions in the quarter from November 2023 to January 2024, providing support for bond prices.
The US interest rate strategist at BMO Capital Markets stated in a report last week, "The positive term premium was triggered by the August refinancing statement, which reversed this trend in November."
In the low interest rate environment after the 2007-2009 global financial crisis and the COVID-19 epidemic, the term premium was basically suppressed for about 10 years. Of course, in the future, if the US Treasury further increases its bond issuance scale and the market's expectation of interest rate cuts cannot be realized, there is still a possibility of fluctuations in the term premium.