The yield of US treasury bond bonds fell from the highest level close to this year on Thursday (February 29). The data released on that day showed that the core PCE price index, the most favored inflation indicator by the Federal Reserve, performed in line with economists' expectations in January, which relieved many industry insiders. The data performance further consolidated the Federal Reserve's expectation of a rate cut in June.
Market data shows that as of the end of the New York session, the yields on US bonds of all maturities have generally declined. Among them, the 2-year US Treasury yield fell 1.9 basis points to 4.629%, the 5-year US Treasury yield fell 1.6 basis points to 4.251%, the 10-year US Treasury yield fell 1.6 basis points to 4.255%, and the 30-year US Treasury yield fell 2.7 basis points to 4.382%.
After the release of inflation data, the benchmark 10-year US Treasury yield erased the increase of about 5 basis points earlier on Thursday, and then further hit the lowest level of the day after an unexpected decline in Chicago PMI indicators and existing home contract sales data. At the same time as the PCE data, the data on the first application for unemployment benefits by the United States last week exceeded expectations - indicating that the labor market was weakening, and the expectation that there would be a purchase of treasury bond bonds at the end of the month also boosted the rebound of US bonds.
According to data released by the US Department of Commerce on Thursday, the core personal consumption expenditure (PCE) price index in January increased by 0.4% compared to December and 2.8% year-on-year, both in line with market expectations. This is also the last PCE report that Federal Reserve officials can see before the March 19-20 meeting, and this data is an important reference indicator that the Federal Reserve is concerned about when considering interest rate cuts.
Analysts point out that the potential inflation indicator favored by the Federal Reserve rose at its fastest month on month rate in nearly a year in January, supporting policymakers to adopt cautious interest rate cutting strategies. However, given that the overall performance of the data meets market expectations, the concerns of industry insiders have overall eased.
Earlier this week, the US stock and bond markets both fell as traders were concerned that PCE price growth would exceed expectations, forcing the Federal Reserve to postpone its first interest rate cut, leading to a readjustment of their positions.
"Before the data was released, bonds were heavily sold off, but after the data was released, they rebounded significantly," said Thierry Wizman, a global forex and interest rate strategist at Macquarie
"Everyone is scratching their heads, why are these numbers not so impressive, but the market has shown a clear rebound? But in fact, what you are facing is a lot of short covering, in other words, what people see is squeezing positions, which is so simple."
The bond market position indicator before Thursday's data showed that in the absence of new information, the momentum for traders to bet on an increase in yields has been exhausted. Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said that holding a 2-year bond at this level doesn't look too bad given that the personal consumption expenditure price index meets expectations.
At present, Federal Reserve Chairman Powell and his colleagues have effectively ruled out the possibility of interest rate cuts next month, and investors tend to believe that June is the most likely window to start cutting rates. The latest bet probability for federal funds rate futures on Thursday was 65.5%, higher than the 57.0% before the release of PCE data.
PIMCO warning: accomplices in this US bond sell-off may reappear
However, although the expected PCE data on Thursday eased the selling pressure of US Treasuries since the beginning of the year, PIMCO, the world's largest bond fund, warned on Thursday that the term premium of US treasury bond bonds may rise again in the case of inflation and rising fiscal deficits.
During the third quarter of last year, when the yield on multiple maturities of US bonds hit a decade high, the premium on US bond maturities was once highly anticipated by bond traders and considered one of the accomplices in exacerbating the selling of US bonds. Looking back, in the low interest rate environment after the global financial crisis and the COVID-19 pandemic in 2007-2009, the maturity premium of US debt was basically suppressed in the past decade or so. Even before this, the premium on US bond maturities had been gradually decreasing since the 1980s.
However, Marc Seidner, Chief Investment Officer of Non Traditional Strategy at PIMCO, and Pramol Dhawan, Portfolio Manager, argued in a recent report that "we are at a time when term premiums may begin to reverse a 40 year downward trend."
They pointed out that the CPI data for January was higher than expected, and recent predictions of an increase in fiscal deficits and the possibility of further increases in bond issuance to cope with the deficit suggest that the term premium may continue to rise again. "The cost of borrowing has now become higher, and the ongoing deficit is also so high. Therefore, we can almost guarantee that interest expenses will continue to rise," they said.
According to an indicator of the New York Federal Reserve, the term premium of the benchmark 10-year treasury bond bond yield is currently negative 0.3%. Last year, due to concerns about rising fiscal deficits and the increase in government bond issuance, the yield of long-term treasury bond bonds rose, and the premium once turned positive. However, under the expectation of the Federal Reserve's interest rate cut, the premium turned negative again.
Seidner and Dhawan stated that if the term premium returns to the level of around 2% in the late 1990s and early 2000s, "it will not only affect bond prices, but also affect the prices of stocks, real estate, and other assets based on future cash flow discounting."
They added that due to the higher yields of some short-term bonds compared to long-term bonds, the US Treasury yield curve is still partially inverted, but due to the rising maturity premium and the expectation of the Federal Reserve shifting towards interest rate cuts, the yield curve may self correct.
PIMCO stated that its investment portfolio currently has a "steep curve tendency", with a preference for 5 to 10 year bonds globally and a low proportion of around 30 year bonds. "After the Federal Reserve's first interest rate cut, the yield curve is likely to show a turning point - short-term yields will decline, medium-term yields will not change much, and long-term yields will rise as term premiums return."