It has been almost nine months since the Federal Reserve completed its last interest rate hike in July last year. However, the current trend of the US Treasury market has raised doubts among more and more market participants about whether the Fed's interest rate hike cycle has really come to an end
The US bond yield is showing a trend that is contrary to the common sense in the past: it is a long time since the Federal Reserve may complete the interest rate increase cycle, but the benchmark 10-year US treasury bond bond yield is still rising, and bond prices continue to fall.
Padhraic Garvey, head of research for the Americas at Dutch International Group, stated that the current trend of 10-year US Treasury yields is almost completely different from when US interest rates peaked in the past. He pointed out that if the Federal Reserve had indeed completed the rate hike, the 10-year Treasury yield would have fallen far from the expected level - three months after the Fed's last rate hike in July last year, the yield had hit a cyclical high of 5% in October and is still high.
"If a Martian lands on Earth, simply looking at the current trend of the 10-year yield, it is likely to conclude that the Federal Reserve has not completed the interest rate hike at all," Garvey said.
The last time Federal Reserve decision-makers raised interest rates was on July 26th last year, when Federal Reserve officials raised the federal funds target rate range to 5.25% to 5.5% - the highest level in 22 years. Last November, Federal Reserve Chairman Powell hinted that the Federal Reserve had completed raising interest rates; As of December last year, the Federal Reserve predicted in its interest rate chart that it would cut interest rates three times, each time by 25 basis points, in 2024.
At the beginning of this year, traders in the interest rate market expected the Federal Reserve to cut interest rates up to six or seven times, and later reduced the expected number of rate cuts to two or three. Currently, they are pushing the expected time of rate cuts back to the second half of this year.
It can be said that this series of hawkish shifts has raised deep doubts about the Federal Reserve's promise to cut interest rates this year, which has also raised concerns about a larger sell-off of long-term US government bonds.
From the perspective of causes, the fluctuation of stable labor market data and inflation data in the United States is undoubtedly the key factor causing the aforementioned market turbulence. And all of this, given this week, is making the upcoming US March CPI data, which will be released tonight, particularly impactful.
Before tonight's CPI "tough battle", an unprecedented scene appeared
From the overnight trend, the yield of US Treasury bonds with various maturities generally fell from high on Tuesday, due to some low buying after the recent series of sell-offs. Bond investors are also waiting for Wednesday's inflation data to determine the next interest rate path.
As of the end of the New York session, US Treasury yields fell across the board. The 2-year Treasury yield fell 4.2 basis points to 4.755%, the 5-year Treasury yield fell 5.2 basis points to 4.383%, the 10-year Treasury yield fell 5.6 basis points to 4.369%, and the 30-year Treasury yield fell 5.3 basis points to 4.5%.
Many industry insiders say that Wednesday's inflation data has become an important puzzle for investors to evaluate whether the Federal Reserve can cut interest rates later this year. According to the latest forecast from industry economists, the overall CPI in the United States is likely to continue to accelerate in March, with a year-on-year increase of 3.5%. Excluding energy and food, the core CPI growth rate is expected to decrease to 3.7%.
Padhraic Garvey, Director of Americas Research at ING, said, "The background is that there has been a seemingly reasonable significant increase in returns over the past week or so, and the market has taken some breath before Wednesday's release of Consumer Price Index (CPI) data. This data will be crucial."
He pointed out that "on any day, bond yields will have an excuse to fall, because the Fed's future interest rate cuts are the biggest 'carrot'. The biggest 'stumbling block' is the US data, and so far the US data does not match the claims of interest rate cuts."
It is worth mentioning that just before tonight's CPI battle broke out, the capital flow in the US fixed income market was quite unusual. At the time of the release of this crucial inflation report, treasury bond bond traders have become so bearish that they may be trampled when the inflation data is better than expected.
The weekly position data of the U.S. Commodity Futures Trading Commission (CFTC) shows that under the recent rise in U.S. yields, funds that use borrowing funds to amplify returns have increased short positions in the treasury bond bond futures market for the first time in two months. The latest customer survey by JPMorgan Chase also shows that as of April 8th, there has been a significant increase in short positions, resulting in net neutral positions for customers for the first time in nearly a year, rather than net long positions.
According to the change of open position contracts, short positions in the US bond market increased again in the trading hours of last Friday and Monday, which reflects that traders are hedging against the risk of further rise in treasury bond bond yields.
However, analysts at Wells Fargo Bank wrote in a report on April 5th that in such a bearish market (bond market), lower inflation data may trigger a more dramatic reaction. They wrote, "Given the recent poor performance of the bond market, we believe that if the month on month increase in core CPI is lower than the industry's consensus expectation of 0.3%, then the reaction of US Treasury yields will be more severe than when the core CPI is higher than expected."
There are already indications that some investors may want to close their bearish bets before the CPI data is released.
On Tuesday, a large transaction of short-term interest rate futures in the United States hit an all-time high, helping to promote the rebound of treasury bond prices. This transaction involves guaranteed overnight financing rate (SOFR) futures, which were launched in May 2018 and have replaced Eurodollar futures as the main tool for betting on the Federal Reserve's interest rate setting.
Data shows that shortly after 9am New York time on Tuesday, 75000 December 2024 SOFR futures contracts changed hands through bulk trading, and CME has confirmed that this is the largest transaction of the product to date. The SOFR futures trading price subsequently rose, indicating that the transaction was initiated by the buyer, and the US Treasury yield further declined to an intraday low. Block trading is a privately negotiated single price transaction that requires meeting the minimum size threshold.
If the US March CPI data released tonight performs well, leading to a renewed expectation of the Federal Reserve cutting interest rates three times this year, then the direct long position of the contract will profit. Of course, this transaction may also be aimed at filling short positions and reducing risk before the data is released.
Anyway, with yields at a high point within the year, the emergence of such bulk trades may be an early sign that some people believe the bearish forces in the bond market are too crowded. As for whether this is really the case, tonight's bond market situation will undoubtedly give the answer