The yield on US Treasury bonds rose collectively again on Wednesday, as investors further cooled their expectations for the Federal Reserve's March rate cut after the latest PMI report showed strong corporate activity in the United States. The demand for the 5-year Treasury bond auction that day was also unusually cold. Looking ahead to the day, the highly anticipated fourth quarter GDP data of the United States is about to be released, and is expected to cast another "heavy bomb" on macro fundamentals.
Market data shows that the yield of US Treasury bonds with different maturities generally rose overnight, continuing the selling trend in the bond market since the beginning of the year. Among them, the 2-year US Treasury yield increased by 0.5 basis points to 4.39%, the 5-year US Treasury yield increased by 4.8 basis points to 4.095%, the 10-year US Treasury yield increased by 5 basis points to 4.183%, and the 30-year US Treasury yield increased by 4.7 basis points to 4.411%.
At present, the yield of 30-year government bonds has climbed to the highest level since December 5th last year. The inverted range of the 2-year/10-year US Treasury yield curve narrowed to about 20 basis points.
In terms of economic data, data released on Wednesday showed that US business activity recorded its largest growth in seven months in January, as an increase in orders gave service providers and manufacturers more confidence in the demand outlook. The initial value of Markit's comprehensive PMI in the United States rose to 52.3 in January, mainly driven by increased activity in the service industry. A score above 50 indicates expansion. Boosted by strong domestic demand, indicators measuring output expectations for the next year have also climbed to the highest level since May 2022.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that based on PMI data, the start of the US economy this year is encouraging, with a significant acceleration in corporate growth and a sharp drop in inflationary pressure.
A major highlight of the US Treasury market on Wednesday is undoubtedly the auction of 5-year Treasury bonds. The US Treasury Department conducted an auction of $61 billion worth of five-year government bonds on the same day, marking the largest auction of the 5-year term since 2021. The final demand situation undoubtedly worries many bond market bulls.
The winning bid yield of the 5-year Treasury bond was 4.055%, while the pre issuance trading level at 1pm Eastern Time was 4.035%, indicating weak demand - investors are seeking to lock in higher returns. The bidding multiple is 2.31 times, the lowest since September 2022. This is in stark contrast to the results of Tuesday's two-year government bond auction - the market's demand for the latter is basically in line with expectations.
The allocation ratio of primary traders was 20.4%, the highest since September 2022, confirming the dismal real demand. Primary traders have the obligation to purchase all bonds that have not been auctioned off to prevent auction failures.
Andrzej Skiba, head of the BlueBay fixed income team for global asset management at Royal Bank of Canada, stated that in addition to the US GDP data to be released on Thursday and the PCE price index on Friday, the market is currently evaluating the increase in government bond supply.
Skiba said, "Before releasing a large amount of data in the next two trading days, there may be some volatile price trends, coupled with a large number of government bond issuances in the coming weeks, which are putting pressure on US Treasury bonds."
Tonight, the fourth quarter GDP data of the United States is about to be released in a heavyweight manner
Looking ahead to the day, the biggest focus of the market will undoubtedly be on the performance of the initial GDP in the fourth quarter of the United States. The median estimate from media surveys shows that the initial annualized quarterly growth rate of US real GDP in the fourth quarter is expected to increase by 2%. Although there will be a significant decline from the 4.9% growth rate in the third quarter, this growth rate is still expected to exceed the expectations of most economists at the beginning of the fourth quarter.
The hot performance of the US economy over the past year has continuously overturned pessimistic predictions of an economic recession.
Christopher Rupkey, Chief Economist at FWDBONDS, said, "The US economy is still flying high enough, and economists should be able to lower those recession forecasts this year. For Federal Reserve officials, the economy is neither too hot nor too cold, but a few rate cuts in 2024 may be appropriate."
Neil Dutta, head of economics at Renaissance Macro Research, pointed out that "inflation in the United States is slowing relatively quickly. The labor market is also slowing, but the pace of the slowdown is not that fast. This effect will continue to promote real income growth. This is not a fully fledged economy, but it is enough to support economic growth."
Undoubtedly, if tonight's US GDP data can achieve steady growth again, it will further consolidate the "soft landing" vision pursued by Federal Reserve officials. The goal of this vision is to reduce the inflation rate to 2% without triggering an economic recession.
Tonight's GDP data and tomorrow's PCE price indicators are likely to provide more clues and guidance on the Federal Reserve's interest rate cut path for the year. At present, with multiple sets of US economic data consistently exceeding expectations in the past few weeks, the probability of the Federal Reserve cutting interest rates in March has dropped to about 42% in the interest rate futures market. At the beginning of this year, this probability expectation even exceeded 80%.
Jimmy Chang, Chief Investment Officer of Rockefeller Global Family Office, stated that the market was concerned about an economic recession last year, but now the concern is that the Federal Reserve has never relaxed monetary policy in a fully employed environment. Chang pointed out, "There are still too many people who believe that the first rate cut may be in March. It will be interesting to see how decision-makers manage this expectation at the end of next week's Federal Reserve meeting."