© Reuters Sign of inflection point for rate hike cycle? The 10-year US Treasury yield continues to fall below the target range of the federal funds rate
November 28 news from the Financial Associated Press (edited by Xiaoxiang)With the arrival of the holiday season at the end of the year, Wall Street, in the festive atmosphere of the last few weeks, seems to have finally dispersed the fog that temporarily covered most of the year, and the stock and bond markets have rebounded. suddenly this month, and some fund managers have also begun to resume Place speculative bets on the hope that a friendly (or at least less hostile) Fed will come back to them.
Market data shows it has risen almost 4% so far this month and is expected to rise for the second consecutive month. Even the European stock indexes, which have always been troubled amid the year, has risen for the sixth consecutive week The index is on track for its biggest monthly fall since 2009, having fallen almost 5% so far this month.
In the bond market, since peaking earlier this month, US 10-year, 5-year and 2-year bond yields have fallen 54bp, 54bp and 30bp to 3.68%, 3.85% and 4.42% respectively. There are signs that the US Treasury market appears to be gearing up for a possible recession next year, even as the Federal Reserve remains busy signaling continued interest rate hikes – with traders anticipating long-term interest rates lower
It is worth noting that in the recent trend of US debt, a sign that investors easily ignore but is actually quite crucial is: even if the market expects the Fed to raise rates interest by about 1 percentage point in the next six months, US 10-year bond yields have now begun to fall below the current range of the federal funds target rate of 3.75%-4%.
Sign of inflection point of interest rate rise cycle?
This view first appeared in mid-November (around the 16th.) At that time, just a few days before the US CPI data came out in October This inflation report showed that the overall CPI data and CPI data October core has fallen. more than expected, and core inflation at its highest. The “dawn” of US bond yields fell rapidly.
And almost since then, the sharp decline in long-term yields has led to the continued widening of the yield curve inversion to the largest in four decades.
Gregory Faranello, director of US interest rate trading and strategy at AmeriVet Securities, said Fed policy is evolving dynamically, and Fed officials are still indicating they will raise interest rates, but market trading is tend to think that the Fed’s tightening cycle is coming. to end
As we mentioned last week, there has also been some action in the options market, with some investors taking steps to hedge against the risk that the Fed will cut interest rates to 2% (half the current rate) by the end of next year .
Current swap market prices indicate that the market expects the benchmark interest rate to rise to a peak of around 5% by the middle of next year, and to cut interest rates by more than 50 basis points from the peak by early 2024. But some are betting on a bigger move towards tightening, with some investors predicting rates could fall to 3% or even 2% by late 2023 or early 2024, according to trades linked to funding rate futures guaranteed overnight (SOFR).
According to statistics from Zhao Wei’s team at Sinolink Securities, looking back at history, after 1982, the Federal Reserve shifted its intermediate target from the M2 quantitative target growth rate to the target money market interest rate.In the subsequent 6 rounds of interest rate hike cycles, US 10-year bond yields were more than 1-2 quarters ahead of the policy rate and peaked.In 2006, which was relatively special, the interest rate rise came to an abrupt end when real estate risks came to the fore, and the US 10-year bond rate peaked at the same time as the policy rate. The current round of US macro indicators of “strengthening outside and getting the job done” may point to the Fed’s interest rate hike action or ending in the first half of next year.
Some large institutional investors, including PIMCO, have also been actively buying US Treasury bonds recently.
Jeffery Gundlach, known as the “new king of debt”, recently said that the rise in US bond yields may have come to an end. A flattening of long-dated yields – the 10-year and 30-year yields are comparable – usually signals the end of a rally in bond yields.
Focus on Powell’s oral data and non-agricultural data
The US economy – especially the labor market – has so far shown considerable resilience in the face of continued interest rate hikes by the Federal Reserve. Therefore, whether the appearance of the above inflection point signal of interest rate hikes and the downward trend in long-term bond yields to continue, the key will undoubtedly be the performance of the US data.Investors will obviously be keeping a close eye on the monthly non-farm payrolls report released by the US Department of Labor this Friday.
The extent of the current long position in the Treasury market and the depth of the yield curve inversion mean that there could be further volatility in Treasuries with the release of a series of top line economic data, including not only the non-farm payrolls report . but also the ISM manufacturing Index, Personal Consumption Expenditure (PCE) Price Index, Number of Job Openings, etc.
They will also listen carefully to the final speeches of Fed Chairman Jerome Powell and his colleagues before the quiet period begins.Although the minutes of the latest meeting suggest that they could ease the pace of the tightening soon, officers remained firm in reaffirming the need for policy rates to be higher than current levels.
Federal Reserve Chairman Powell is scheduled to deliver a speech on the economy and the job market at 2:30 a.m. Beijing time on Thursday, a time before Fed officials need to stop speaking publicly to prepare for for the mid-December policy meeting. The period of silence” will last only two days.
Simon Harvey, senior currency analyst at Monex Europe, said, “Powell’s first comments after the November 2 meeting will be crucial. If he does not choose to stop easing monetary conditions in the near term, the dollar’s short-term support may slip. “
In terms of volatility indicators, while the recent US stock market fear index VIX has fallen with the rebound in US stocks, the bond market volatility indicator, the Bank of America MOVE Index, remains elevated. For bond market investors, with the approach of the Federal Reserve’s decision in mid-December, it is clear that the last shift is still needed before the holiday season at the end of the year…
