US Bond Rebound Weak, Traders Eye CPI Amid Resurgent Inflation Fears
In light of the strong U.S. non-farm payrolls in September reigniting inflation concerns, traders are anxiously awaiting the release of Thursday's CPI data, with U.S. Treasury yields struggling to rebound on Tuesday.
On Tuesday, October 8th, U.S. Treasuries initially rose across the board, ending a four-day losing streak, with short-term bonds leading the way. During the European stock market morning session, the yield on the two-year Treasury note fell by about 6 basis points, the yield on the ten-year Treasury note dropped by more than 3 basis points to below 4%, and the yield on the thirty-year Treasury bond fell by nearly 3 basis points.
However, U.S. Treasuries subsequently retreated, with long-end bonds still being sold off and turning negative. Before the U.S. stock market opened, the yield on the ten-year U.S. Treasury note rebounded by about 3 basis points to 4.053%, hovering at its highest level since August 1st.
Following the better-than-expected non-farm payrolls report, the market continues to bet on a strong recovery for the U.S. economy, while inflation concerns make a comeback. Expectations for significant rate cuts by the Federal Reserve have cooled, enthusiasm for purchasing U.S. Treasuries has waned, and long-term bond yields remain above 4%.
Advertisement
Deutsche Bank strategist Jim Reid stated that growing concerns about increasing inflation risks prompted a new round of bond selling yesterday, as investors reduced their expectations for rapid rate cuts by the Federal Reserve.
Reid also noted that the recent rise in oil prices has pushed up U.S. Treasury yields, as this could potentially reignite inflationary pressures.
"With the rise in oil prices and strong U.S. macroeconomic data, investors' pricing of inflation risks has further strengthened. In fact, the U.S. two-year inflation swap rate rose to 2.39% yesterday, reaching its highest level in nearly three months, after briefly falling below 2% last month."
Plurimi Wealth Chief Investment Officer Patrick Armstrong said on Bloomberg Television:
"The market is indeed getting ahead of itself in pricing in rate cuts by the Federal Reserve. I believe that by 2025, inflation could become a problem again."
St. Louis Federal Reserve President Musalem also warned on Tuesday that any further rate cuts should be gradual.In search of clues for the Federal Reserve's next move, traders are currently focusing on Thursday's CPI data, which they anticipate will show a gradual slowdown in the pace of price growth in the United States. Concurrently, traders are also monitoring the demand levels for the three-year and ten-year bond auctions on Tuesday and Wednesday, respectively.
However, Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, harbors no doubt about further deceleration of U.S. inflation. He stated that investors still need to prepare for a reduction in interest rates, expecting the Federal Reserve to lower rates by half a percentage point each in November and December.
"The U.S. data is not strong enough to suggest that the Federal Reserve is nearing the end of a global rate-cutting cycle."
According to the CME FedWatch tool, the market currently anticipates an 88.7% probability of the Federal Reserve lowering rates by 25 basis points at its meeting on November 7th. A week ago, the market estimated a 36.8% chance of a 50 basis point rate cut in November, but this probability is now zero.
Furthermore, the market also expects the Federal Reserve to lower rates by approximately 50 basis points by the end of this year and by less than 150 basis points by October 2025. This expectation is about 200 basis points lower than the forecast at the end of September.
Leave a Comment