Treasuries’ best day since March driven by signs Fed may be done
Bond investors are starting to bet that the worst-ever rout in US Treasuries might soon be over.
US 10-year yields slid the most since March in early Asian trade after dovish comments from Federal Reserve officials fuelled speculation the US tightening cycle was about done, and the jitters over the Israel-Hamas war added haven demand. The move was more pronounced than normal as trading of cash Treasuries had been shut worldwide on Monday (Tuesday AEDT) for a US holiday.
Jerome Powell, chairman of the US Federal Reserve. Bloomberg
Two Fed officials speaking on Monday expressed the idea that the recent surge in US yields may have done some of the job of tightening financial conditions for them.
The Fed speakers “seemed very much on the same page in noting higher bond yields and tighter financial conditions will impact their thinking on the Fed funds rate,” said Andrew Ticehurst, a rates strategist at Nomura in Sydney. “Market pricing suggests the Fed likely won’t hike this year,” he said, adding there may still be a risk of a final “insurance” increase.
Fed vice chairman Philip Jefferson said he was watching the increase in Treasury yields as a potential further restraint on the economy even though the rate of inflation remained too high. Fellow policymaker Lorie Logan said the recent increase in long-term yields could indicate less need for the central bank to raise rates again.
Fed-meeting-dated swaps now show about a 65 per cent chance the central bank will stay on hold in December, compared with 60 per cent odds on another increase by then, just a week ago. They are even more confident policymakers will not raise rates at any of the other gatherings through to mid-2024.
US 10-year yields fell as much as 18 basis points to 4.62 per cent, the biggest one-day decline since March 22. Two-year yields slipped as much as 16 basis points to 4.92 per cent.
Bonds in other markets rallied along with Treasuries. Australian 10-year yields slid nine basis points, while those on similar-maturity New Zealand notes slipped seven basis points. The drop in Treasury yields also caused the dollar to weaken against most of its Group-of-10 peers, while boosting Asian stocks.
“With events quickly escalating in the Middle East and the recent bond selloff pushing long-term yields to new multi-decade highs, policymakers will be reluctant to hike,” Althea Spinozzi, a senior fixed-income strategist at Saxo Bank, wrote in a research note.
Bond investors have had their hopes for an end to rate increases dashed before. A rally after the banking crisis that sent 10-year yields as low as 3.25 per cent in April was followed by waves of selling as the Fed kept tightening policy.
Treasury yields have surged in recent months amid concern that stubborn inflation will convince the Fed to keep borrowing costs higher for longer. An index of US government debt has dropped 2.6 per cent this year, heading for a third year of losses.
The recent run-up in yields “might give the Fed extra reason for pause in the short run, but it’s too early to call this justification for the end of the cycle,” said Robert Thompson, macro rates strategist at Royal Bank of Canada in Sydney.
The Fed’s rate increases have so far failed to bring inflation back down to the central bank’s 2 per cent target, and the US economy still appears to be resilient. Yields have also risen this year on concern about increased Treasury issuance, which is needed to fund widening government deficits.
Bloomberg
Bloomberg
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