Treasury yields surged to their highest point this year on Monday, but instead of sparking a sell-off, they attracted a wave of new buyers. This unexpected turn of events reflects a shift in market expectations regarding the Federal Reserve’s interest rate policy.
Earlier forecasts anticipated three rate cuts from the Fed in 2024. However, strong employment data released last Friday cast doubt on this prediction. Swap contracts, which gauge market sentiment on Fed actions, are now pricing in only 60 basis points of easing throughout the year, with the first cut potentially delayed to September.
This change in outlook led investors to demand higher returns on Treasuries, pushing the benchmark 10-year yield above 4.45% for the first time since November. Despite the rise in yields, the lingering possibility of some degree of Fed easing remains a positive factor for the market.
Large-scale buying activity was observed in the futures market, particularly for the 10-year note, suggesting the presence of bargain hunters targeting attractive entry points.
“Treasury yields are nearing the upper limit of our projected range, making them a compelling investment opportunity,” commented Steven Oh, global head of credit and fixed income at Pinebridge Investments.
Market anticipation is high for even stronger demand for 10-year Treasuries if yields surpass 4.5%, a level unseen since November. Yields across all maturities reached new 2024 highs, including a two-year yield reaching its highest point since March at 4.79%.
The resilience of economic data and recent comments from Fed officials suggesting a more cautious approach to rate cuts have all contributed to the tempered expectations for aggressive easing. Some officials even expressed concerns about the potential for inflation to stall, hinting at the possibility of future rate hikes.
Wednesday’s release of US consumer price data is the next major event on the market’s radar.
At the beginning of the year, the market widely anticipated that the Fed’s series of rate hikes would not only curb inflation but also trigger an economic slowdown, leading to expectations of as many as six rate cuts in 2024. However, progress on inflation reduction has been slower than anticipated, economic growth remains robust, and investor appetite for stocks and corporate bonds remains strong, suggesting that the economy may not require significant easing at this time.
This has resulted in a sell-off in Treasuries, disrupting the plans of investors who had positioned their portfolios for a strong performance in the bond market. A Bloomberg gauge of US Treasuries has fallen 2% so far this year.
“There’s a real risk of Treasury yields rising even further,” warned Nils Overdahl, a senior portfolio manager at New Century Advisors. “The recent positive data allows the Fed to take a wait-and-see approach. Additionally, the data’s strength, combined with the likelihood of some rate cuts this year, raises questions about the longer-term outlook for inflation.”
Overdahl indicated that New Century Advisors is currently holding off on purchasing Treasuries, emphasizing the importance of patience, particularly with key inflation data due for release on Wednesday.