With the Federal Reserve releasing clear signals of multiple interest rate cuts next year overnight, the high interest rate "dam" built by Powell and his colleagues in the market over the past two years seems to have collapsed with a bang. On Thursday in the Asian session, the 10-year US Treasury yield fell below the 4% mark for the first time since August, and the US dollar index further hit a four month low.
Market data shows that the 10-year US Treasury yield has recently fallen to around 3.954%, and the 2-year US Treasury yield, which is most closely related to the Federal Reserve's interest rate expectations, has continued to decline after a 31 basis point drop overnight. In the Asian session, it recorded another double-digit decline of about 11 basis points.
Previously, on Wednesday's Federal Reserve interest rate day, US bond prices had just recorded their largest daily increase since the bankruptcy of Silicon Valley Bank in March.
At the same time as the decline in US bond yields, the US dollar further weakened within the day. The ICE US dollar index hit its lowest point in Asian trading at 102.42, the lowest level since mid August, and the Bloomberg US dollar index also hit a four month low.
John Hancock Investment Management's Co Chief Investment Strategist, Matthew Miskin, said, "The Federal Reserve has completed a rate hike, and the market has gained stronger confidence in it. People are extremely excited about it."
At the final interest rate meeting in 2023, the degree of dovism of the Federal Reserve undoubtedly amazed everyone: as expected, the Fed continued to stop raising interest rates, keeping the benchmark interest rate unchanged at 5.25% -5.5%. This was the third consecutive pause in interest rate hikes since the 25 basis point hike in July, almost indicating the cessation of de facto rate hikes. In the most eye-catching interest rate chart, most central bank officials expect three interest rate cuts in 2024, exceeding the pre predictions of many industry institutions.
"This has given investors a green light, and the Federal Reserve is very satisfied with what they see," BlackRock's portfolio manager Rosenberg said in an interview,.
It is worth mentioning that, by historical standards, the current yield of US treasury bond bonds is still very high. In 2020, when the Federal Reserve cut interest rates to 0-0.25% in an emergency after the epidemic, and the Federal Reserve purchased bonds on a large scale to further support the U.S. economy, the yield of five-year treasury bond bonds had been lower than 0.20% for a long time.
For most of the past three years, the bond market has been hit by soaring US CPI data and the Federal Reserve's aggressive interest rate hikes to curb inflation. However, now, the bond market is looking forward to a comprehensive reversal that will push up the value of debt issued at higher yields. Currently, with only the last half of the year left until the end of the year, US Treasury bonds are poised to achieve their first annual rise in three years, with Bloomberg's bond composite index rising nearly 3% so far this year.
Compared to the increasingly clear downward trend of bond yields, the future trend of the foreign exchange market is more complex.
Later on Thursday, the European Central Bank and the Bank of England will also announce interest rate resolutions one after another. Whether they will follow the Federal Reserve's dovish approach may determine the next step in the US dollar index in the foreign exchange market.
At present, although the US dollar is set to decline for the second consecutive month after hitting its largest monthly decline in a year in November, the future of the US dollar will also depend on signals from other major central banks regarding the pace of interest rate cuts in the face of the balance between anti inflation and economic fragility.
"The Federal Reserve's decisive shift towards interest rate cuts has weakened the short-term outlook for the US dollar in all aspects," said Richard Franulovich, head of foreign exchange strategy at WestPacific Bank in Sydney. "Although the long-awaited door to a major reversal of the US dollar is now open, we still believe that it will take time to form."