Source: Zhitong Finance
US Treasury yields rose to 2024 highs, and given evidence that pressure on US prices continues, people have doubts about the ability of the Federal Reserve to start cutting interest rates later this year.
This Friday, the US will release another key inflation report, which may further weaken expectations of cutting interest rates once this year. Even so, demand for treasury bonds worth more than $180 billion is still quite strong this week, indicating that investors still tend to view surging yields as a buying opportunity.
George Goncalves, head of US macro strategy at MUFG, said, “Many macro news are currently embedded in the yield curve.”
He said that prior to the release of inflation data on Friday, the Treasury's announcement of tax rebates, and the Federal Reserve meeting next week, steady auction demand “shows that the market is effective, and there is currently no desire to pay too high a price for US Treasury bonds.”
On Thursday evening, the US released two major data in a row. GDP grew by 1.6% on an annualized basis in the first quarter, while the closely watched core PCE price index grew at a rate exceeding expectations of 3.7%. Based on these data, traders have reduced their expectations for when the Federal Reserve will cut interest rates and set the time for the first rate cut in December. Now, they believe that the Federal Reserve will only cut interest rates by about 33 basis points for the full year of 2024, which is far below the expectations of cutting interest rates by more than 150 basis points at the beginning of the year.
Sinead Colton Grant (Sinead Colton Grant), chief investment officer at BNY Mellon Bank of New York (BNY Mellon), said: “The inflation rate at the end of this year will be between 2.5% and 3.5%.”
US Treasury yields remained high throughout the trading session as traders looked forward to more economic indicators released on Friday. The March PCE price index is expected to rise from 2.5% in February to 2.6% in March, and this will indicate that the pace towards the Federal Reserve's 2% target has basically stalled.
Subsequently, US policymakers will meet next week and announce the latest policy statement. People may pay attention to Federal Reserve Chairman Powell's comments on recent data and the impact on future interest rate trends. In March of this year, Federal Reserve officials predicted that interest rates would be cut by 75 basis points in 2024, and next weekend's employment data will also provide more clear information on the economy.
Bank of New York's Colton Grant (Colton Grant) believes that the “biggest danger” for investors is to focus on the number of interest rate cuts this year and “ignore the grand prize, that is, the ability to add a better diversification tool to the portfolio at a higher level of return.”
Before buyers stepped in, the yield on the benchmark two-year treasury bond rose as high as 5.02%. The 10-year US Treasury yield was over 4.70%, which also attracted buyers.
As yields rose, the Ministry of Finance was able to sell 44 billion US dollars of seven-year treasury bonds, in line with expectations, putting an end to the three auctions hotly discussed in the market this week.
Overall, the Ministry of Finance's sales were favored by buyers without much effort. Strong demand for two-year note auctions forced yields to fall below the bid deadline, and five-year note auctions weakened slightly.
Meanwhile, the yield of the seven-year treasury bond auction was 4.72%, the same level shown in pre-auction trading at 1 p.m. New York time, which indicates that demand has met traders' expectations. According to data from the Bank of Montreal Capital Markets (BMO Capital Markets), bond traders that underwrote the seven-year treasury bond auction had only 13.9% of the bonds left, which is lower than the recent 15.1% average.