Signs of continued strength in the US labor market and lingering inflation in Europe were enough for bond investors this week to push yields to new milestones as interest rate expectations continue to readjust.
The 10-year Treasury yield
ended Thursday’s US session above 4% for the first time since November, and traded there again on Friday morning.
BMO Capital Markets strategists Ian Lyngen and Ben Jeffery said the benchmark rate is near the top of what they see as a 100-125 basis point trading range centered around 3.5% , which means that the rate could reach 4.5% or 4.75% at times. point if the bond selling momentum continues.
For now, Lyngen and Jeffery are putting back on the map the intraday highs of 4.241% to 4.335% in the 10-year yield reached at the end of last year.
March marks the one-year anniversary of the Federal Reserve’s first interest rate hike in the current tightening cycle, and the outlook for inflation in developed markets has only darkened since.
Friday’s U.S. data, produced by the Institute for Supply Management, showed business conditions at service businesses, such as hotels and hospitals, remained at a robust level in February. It came a day after US initial weekly jobless claims fell below 200,000 for the seventh consecutive week in late February, a sign of continued strength in the labor market. Meanwhile, inflation has not come down as much as expected in the US or the Eurozone, with the latter recording an annual CPI inflation rate of 8.5% last month.
Combined, this represents returns of over 4% across much of the Treasury market, although the 30-year rate BX:TMUBMUSD30Y pulled back from that mark on Friday.
As with almost everything in financial markets, bond trading is a two-way street. Yields tend to rise whenever inflation fears cause investors to sell bonds. These rates then begin to fall again as a new group of investors, attracted by higher yields, return to buy fixed-income securities at more attractive yields than they could obtain elsewhere, such as equities.
The latter scenario is the one that played out Friday morning, as buying demand reappeared across much of the Treasury market and briefly took the 10-year yield below 4% before ISM data n arrive.
“We don’t think the 10-year can stay above 4% for a long time without affecting the economy, and we expect to see an increase in unemployment over the course of the year,” said Rhys Williams, chief strategist at Spouting Rock Asset Management, which oversees $2.3 billion in Bryn Mawr, Pennsylvania assets.
“We wouldn’t be too negative on stocks and bonds, as we think stocks and bonds will rally strongly at the first sign that PCE inflation is slowing and unemployment is rising, and we think that’s likely in the next three months,” Williams said.
The 10-year yield ended Thursday at 4.072% in New York, the first time it has closed above 4% since November 9, 2022. Prior to October through November of last year, the yield did not is not always traded above 4%. since 2007-2008.
Fed policymakers have tightened 450 basis points over the past year, raising their benchmark rate target to 4.5% and 4.75% from near zero. Fed funds futures traders on Friday boosted their expectations of a quarter-percentage-point rate hike on March 22 and largely stuck to their view of an interest rate above 5 .5% by September. Meanwhile, the policy-sensitive 2-year rate BX:TMUBMUSD02Y remained just below 5% or the highest level in over a decade.
Remarks from Atlanta Fed President Raphael Bostic dampened some market moves Thursday night. Bostic said the central bank may be able to suspend rate hikes this summer, which helped send U.S. stocks
to a solidly superior finish Thursday and held them in place Friday morning.
Over the past month, “inflation expectations have soared and US 2-year and 5-year breakevens are now at 7-month and 4-month highs, respectively,” Deutsche Bank’s Jim Reid said. in a note. “To be blunt, the inflation call is tougher now than it was in 2020-22,” describing it as a “sticky, messy outlook.”
“Further, structural forces turn inflationary, including those related to deglobalization and demographics,” Reid wrote. “But in the near term, inflation is likely to remain stable until the monetary surplus has been eradicated and the US recession that we expect hits later this year. After that, we could fall sharply given monetary trends. and policy lag, before structural forces reappear again in the next cycle.
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