U.S. Treasuries rose for the fourth straight week in the week that ended on the 22nd, marking their highest streak since March. Investors are becoming increasingly confident that the US Federal Reserve will cut interest rates in the first quarter of next year.
The personal consumption expenditure (PCE) core price index, the underlying inflation indicator that the U.S. financial authorities focus on, rose only 0.1% month-on-month in November, indicating that the authorities are hoping to overcome upward pressure on prices and move aggressively in 2024. The scenario of implementing monetary easing has been reinforced.
Expectations of lower interest rates have led asset managers to invest in U.S. Treasuries in recent weeks, taking what Citigroup calls “extreme” positions. Longs in ultra-long 30-year bond futures are at their highest level since August 2019, according to data from the U.S. Commodity Futures Trading Commission (CFTC) through Wednesday.
The swap, which is timed to coincide with the Federal Open Market Committee (FOMC) meeting, factors in a more than 90% chance that the Fed will cut interest rates from the current range of 5.25% to 5.5% next March. For all of 2024, traders are expecting a rate cut of about 160 basis points (bp, 0.01%), more than double the quarterly forecast from officials released earlier this month.
Discussion on US interest rate cuts
“With year-over-year core inflation at its lowest level in nearly three years, the next macro question is when to cut U.S. interest rates,” BMO Capital Markets strategist Benjamin Jeffery said in a note. I commented. He added that he thinks the first quarter of next year is too early.
Although indicators related to durable goods orders were much higher than expected, prompting banks to liquidate their positions, they did not make any major changes to their interest rate forecasts.
The yield on the 10-year US Treasury note closed up less than 1 basis point on the 22nd. It is currently hovering around 3.90%, down more than 1 point from October’s 16-year high of 5.02%. The two-year yield is around 4.32%, down slightly from 5.26% in October.
bond resurrection
U.S. Treasuries have risen 3.6% year-to-date through Wednesday, according to Bloomberg data. The three consecutive years of year-on-year declines have come to an end.
However, a planned $155 billion (approximately 22 trillion yen) auction could limit further declines in yields this year. A $57 billion two-year bond is scheduled to be auctioned on the 26th, a $58 billion five-year bond will be auctioned on the 27th, and a $40 billion seven-year bond will be auctioned on the 28th.
And while slower inflation is good news for monetary authorities, the data released on Monday also includes strong numbers on incomes, which could stimulate consumer spending. This poses a risk for bond markets heading into the new year and could end their winning streak.
Traders have been caught off guard many times in the past by pricing in too quick and sudden a turnaround in monetary easing. As Citi points out, there are risks to continuing to increase long positions in U.S. Treasuries.
In a monthly Bloomberg survey, the median expectation was for a 0.25 percentage point cut in June 2024 and three more cuts in the second half of the year.
Original title:US Bonds Are on Best Run Since March as ‘Extreme’ Rate Bets Grow(excerpt)
2023-12-24 02:15:12
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