The yields of the US Treasury bonds will rise modestly in the coming months due to expectations that financial markets have once again overestimated how much the Federal Reserve interest rates this year.
The performance of the US Treasury bonds The benchmark 10-year yield, which moves inversely to prices, hit a 14-month low of 3.67% in early August after a safe-haven rally on fears that a possible recession in the world’s largest economy would force the Fed to make rapid rate cuts.
The inflation which is trending towards the US central bank’s 2% target and recent signs of weakness in the labor market also pushed interest rate futures last week to price in about 120 basis points of Fed rate cuts in 2024.
However, investors have since attributed the recent increased volatility of the market to the liquidation of large leveraged positions that caused a sudden rise in the Japanese yen and a fall in the Tokyo stock market early last week, rather than to major concerns about the US economy.
The Wall Street investor anxiety barometer, the volatility index CBOE (.VIX)retreated sharply after hitting a four-year high last week, while stocks made a resounding recovery after the most dramatic drop of the year.
This rapid cooling was accompanied by a moderation in the price of rate cuts to around 100 basis points, though still double the amount forecast just a month ago.
Those bets are likely to face disappointment on a lack of policy follow-through, according to medians in a Reuters poll of bond strategists from August 7-13, which stuck to markets’ previous view of 50 basis points of Fed rate cuts by year-end.
“The market of the Treasure “It is pricing in an overly draconian economic scenario; the recession probability built into the rates market prices, specifically, is too high,” he said. Vishal Khanduja, Co-Head of Broad Market Fixed Income at Morgan Stanley Investment Management. “What has been discounted until the end of the year? We do not believe that the Fed will be able to cut rates that many times. We expect two, maybe three cuts by January,” he added.
What does the market expect?
Only two of the 31 respondents said that the Fed would cut as much or more than the current market price of 100 basis points in the remaining three meetings of the FOMC this year. The yield on 10-year Treasury bonds, currently around 3.90%, is expected to move very little in the coming months.
The yield would rise modestly to around 4.00% in a month and trade around that level at least through the end of January, according to the median forecasts of nearly 45 bond strategists surveyed. It would then fall just 10 basis points to 3.90% in a year.
A three-quarters majority of respondents, 15 of 20, also said the 10-year bond yield was more likely to be lower than expected by year-end, rather than higher.
The rate-sensitive 2-year Treasury yield, currently at 4.00% and down about 30 basis points since early August, is set to rise marginally to 4.20% in three months, according to survey medians. It would then fall 20 basis points to 4.00% by late January and then another 30 basis points to 3.70% in a year.
If realized, the “inverted” spread between 2- and 10-year Treasury bond yields, historically a reliable indicator of a recession in USAwill return to zero at the end of January, before turning positive by 20 basis points within a year.
Source: Ambito
