At the close of Tuesday (January 9th), the US Treasury yield remained largely unchanged from the previous trading day, as investors watched and evaluated the economic data to be released this week, which may provide hints about the direction of monetary policy (especially interest rates). Previously, investors digested the spirit of a key Federal Reserve official's speech.
In terms of individual bonds, the yield of 2-year US Treasury bonds remained unchanged from Monday's 4.36%; The 10-year US Treasury yield increased by 1 basis point to 4.02% from 4.01% late Monday; The yield on the 30-year US Treasury bond increased by 1 BP to 4.18%. The yield spread between 10-year and 2-year US Treasury bonds narrowed slightly to -34BPs.
Federal Reserve officials continue to hedge their predictions about the most likely direction of monetary policy rates. Later on Monday, Federal Reserve Governor Michelle Bauman said she believes inflation may further decline without further interest rate hikes, but the recent easing of financial conditions may also lead to economic growth or a re acceleration of inflation.
The December survey released by the New York Federal Reserve on Monday showed that consumers' one-year inflation expectations have dropped to their lowest level since January 2021, and their medium to long-term expectations have also declined. Considering this, traders are paying attention to the US December Consumer Price Index (CPI) to be released on Thursday, as well as the Producer Price Index (PPI) to be released the next day.
The US economic data released on Tuesday showed that the US trade deficit unexpectedly narrowed by 2% in November to $63.2 billion. Due to the slowdown in domestic demand in the United States, consumer goods imports have dropped to their lowest level in a year. If this trend continues in December, it may have no impact on trade's economic growth in the fourth quarter. Economists previously predicted that the deficit would increase to $65 billion.
The World Bank warned on Tuesday that global economic growth will slow down for the third consecutive year in 2024, which will lead to longer periods of poverty in many developing countries and further deterioration of their debt situation.
In the primary market, the US Treasury Department issued two issues of treasury bond totaling US $122 billion on Tuesday (January 9, local time), of which CMB issued US $70 billion in 42 days and three-year treasury bond issued US $52 billion. Will Hartman, capital market strategist of Bank of Montreal, Canada, said that the three-year treasury bond tender of US $52 billion that day by the US Treasury Department was "strong" and achieved a "robust" result.
On Wednesday (January 10), the US Treasury Department will issue two issues of treasury bond worth US $93 billion, including 17 week short dated bonds worth US $56 billion, and 10-year treasury bond worth US $37 billion. The actual duration is 9 years and 10 months.
CME's Federal Reserve observation tool shows that the market expects a 95.3% chance that the Federal Reserve will maintain interest rates at 5.25% -5.5% unchanged on January 31st. The likelihood of a rate cut of at least 25 basis points by March is expected to be 65.7%, lower than the 79% seen a week ago.
"As inflation rates decline and the Federal Reserve signals the end of its historic tightening cycle, the outlook for bond investors is becoming clearer. Even after a significant rebound at the end of 2023, yields still appear more attractive than they have been in the past decade," said Pramod Atluria, fixed income portfolio manager at Capital Group.
"The Federal Reserve's inflation target is within reach, and if economic growth continues to cool, interest rates may rapidly decline. The outlook for holding periods seems optimistic. There are also opportunities in positioning the yield curve. As the Federal Reserve lowers interest rates, cash equivalents may not appear as attractive," Atluri wrote in an online report.
PIMCO, the US bond management company, said that it was too early to declare victory over inflation, and the risk of recession still existed. Although the market expected that the US economy would achieve a soft landing, the Federal Reserve was expected to cut interest rates this year.
The European Central Bank's governing committee, Villeneuve de Gallo, stated that once there is evidence that the inflation outlook has stabilized at a level consistent with the 2% target, the ECB will cut interest rates this year. He did not provide a timetable, stating that the decisions of the European Central Bank will be guided by data and will not act hastily; The European Central Bank's regulatory commission, Senteno, stated that the timing of the ECB's interest rate cut will be earlier than it has recently anticipated, and a decision should not be made until May, as there is no sign of facing greater inflationary pressure.
In other overseas markets, European bond yields rose on Tuesday, as investors further lowered their bets on a rate cut in 2024 and prepared to welcome more government bond issuances. The 10-year German bond yield increased by 6BPs to 2.18%; The 10-year Italian bond yield has risen to 3.85%, and the yield spread between the 10-year Italian bond and the same period German bond remains at 165BPs.