U.S. bond traders are preparing for a turbulent week. The U.S. jobs report, due out Wednesday, could push 10-year Treasury yields higher toward the 4% level that market watchers expect to lure investors into the Treasury market.
On June 29, the U.S. Treasury market saw an upward revision to the confirmed value of U.S. real GDP (gross domestic product) for the first quarter (first quarter) and a sharp decline in the number of U.S. initial unemployment insurance applications. At one point, the 10-year bond yield was 3.89%, just a touch away from the 4% mark.
Fed Chairman Jerome Powell’s Fed’s expectations of a rate cut this year have receded, and Treasury yields have approached year-to-date highs for most maturities.
In the week starting on the 3rd, the announcement of major economic indicators for June, including employment statistics, will be in full swing, and the minutes of the Federal Open Market Committee (FOMC) meeting on the 13th and 14th of the same month will also be released.
But for bond investors now, the key question is whether yields near 4% are attractive and whether they sufficiently offset the risk that the Fed will be unable to keep inflation under control.
Zachary Griffiths, senior fixed income strategist at CreditSights, said if 10-year yields hit 4%, “there will be increased demand” from investors.
CreditSights sees a 50/50 chance of an additional 0.25 percentage point rate hike at the FOMC’s next meeting on July 25-26, and a 0.25 percentage point cut at each meeting in 2024.
4.5% is a conservative level
Meanwhile, JPMorgan Chase & Co. rates strategists backtracked on their bullish outlook on Treasuries.Former New York Fed President Dudley also called 4.5% a “conservative estimate” for the peak 10-year yield.squareshowed that.
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All of this depends on how many more rate hikes the Fed has to do to keep inflation under control and whether it can squelch inflation without triggering a painful recession. be done.
At its June meeting, the Federal Funds (FF) rate target range remained unchanged at 5-5.25%, in line with most market expectations, while the latest quarterly economic forecasts predicted two more rate hikes this year. .
The FOMC’s minutes, due out Wednesday, may clarify the rationale for keeping rates unchanged. Powell said the pause in rate hikes was appropriate to assess the effect of previous rate hikes on the economy.
In March, some U.S. regional banks went bankrupt due to losses on securities holdings related to interest rate hikes, and signs of trouble became apparent, but other economic indicators such as employment-related indicators remained strong.
“Markets are very closely watching the labor market as an area that needs to soften if the Fed really wants to end the current tightening cycle,” said Dominique Constam, head of macro strategy at Mizuho Securities. . Officials are “clearly concerned that policies are not constraining enough to curb inflation,” he said.
Original title:Dizzying Bond Moves Put 4% Yield in Play to Win Over Investors(excerpt)
2023-07-02 05:48:07
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