After experiencing the roller coaster market in the first half of this year, US bond investors seem to have returned to their original starting point
A Bloomberg index measuring the total return rate of the US treasury bond bond market shows that, towards the end of the first half of the year, the index will decline by only 0.1% in 2024. In April, the annual decline of US treasury bond was as high as 3.4%.
It can be said that the long positions in US Treasury bonds have regained the lost ground in the first four months of this year in just two months. The core reason for the recent rebound in bond prices is obviously not difficult to find - investors bet that the US economy and price cooling will persuade the Federal Reserve to eventually cut interest rates earlier and more than originally expected, thus effectively curbing the rise in treasury bond bond yields.
"We have seen the top of (US Treasury) yields," said Stephen Miller, a Sydney GSFM investment strategist with 40 years of market experience. "Bonds are now back in their rightful position in a multi asset portfolio.".
In the first four months of this year, panicked bond market investors have been selling bonds due to concerns about long-term interest rate hikes in the United States. The yield of two-year treasury bond, which is particularly sensitive to interest rate policy, once soared to more than 5% in April. However, in the short term, the yield has fallen to around 4.70%, as a series of recent data, including inflation and retail sales, suggest that the US economy may soon cool enough to lower borrowing costs.
Although some Federal Reserve officials have expressed in the past week that they need more evidence to prove that price pressures have indeed eased before truly lowering interest rates. But the market has already made an early bet, and the latest pricing in the interest rate swap market shows that traders currently believe that the Federal Reserve will cut interest rates twice this year.
Earlier this week, Federal Reserve Governor Kugler stated that if the economic situation develops as expected, it may be appropriate for the Federal Reserve to cut interest rates "later this year.". The newly appointed Federal Reserve Chairman of St. Louis, Moussalem, stated in his first important policy speech that it may take "several quarters" of time for the data to support interest rate cuts.
The high volatility of the bond market is expected to ease
Regarding the future direction of the US bond market, Rachana Mehta, co head of fixed income at Maybank Asset Management, believes that the 10-year US bond yield is expected to fluctuate within a wide range of 4.2% to 4.5%. Approaching the high point of this range would be a good buying opportunity.
Mehta said in an interview, "We hope that the volatility of the past bond market has subsided with the recent release of US data. You can continue to hold 10-year US bonds around 4.4% to 4.5% for how long."
It is worth mentioning that as the Federal Reserve and investors begin to agree on the expected number of interest rate cuts this year, the volatility of the US treasury bond bond market, which is up to $27 trillion, has also fallen from its recent high. ICE BofA MOVE Index, an index tracking the expected volatility of US treasury bond bonds based on options, prepared by Bank of America, hovers around 98 at present, lower than the peak of 121 set in April.
Desmond Fu, portfolio manager at Western Asset Management, said, "The most crucial point here is that the price difference between market expectations and Federal Reserve pricing has narrowed. This effectively reduces volatility."
Of course, not everyone believes that US treasury bond bonds have upside space at present. Barclays Bank strategists earlier this month suggested turning back to short 10-year treasury bond bonds because they bet that US economic activity would rebound after two consecutive times of weaker than expected data.
Padhraic Garvey, Global Head of Debt and Interest Rate Strategy at ING Financial Markets, believes that the market will closely monitor the PCE Price Index released on June 28th, which is the most favored inflation indicator by the Federal Reserve. It is expected that the index will show further easing of price pressure in May.
According to the median estimate from economists surveyed by the media, the annual rate of the core PCE price index is expected to drop to 2.6% in May, which will be the lowest since 2021.
"This will make the basis for interest rate reduction in September more stable," Garvey and his colleagues wrote in a report. "We are continuing to regard 4% as a feasible target for the yield of 10-year treasury bond bonds.".