Prior to the release of the interest rate decisions by the Bank of Japan and the Federal Reserve this week, the US fixed income market seemed to have become increasingly anxious in advance
As the market's expectation of the Federal Reserve's interest rate cut this year continues to decrease, the yield of the two-year US treasury bond bond, which is most closely related to the interest rate expectation, climbed to the highest level since the beginning of the year on Monday. At the same time, treasury bond bond investors are also scrambling to escape the world's largest long-term bond ETF.
Market data shows that iShares 20-year and above US Treasury ETFs (TLTs) fell again on Monday, marking its eighth consecutive day of weakness - the longest consecutive decline since the fund's establishment in 2002. At present, the main long-term fund in this market has experienced capital outflows for five consecutive weeks, with a total withdrawal of up to $2 billion during this period.
This is vastly different from last year's situation, when traders invested billions of dollars in TLT because they believed that as the Federal Reserve's interest rate hike cycle came to an end, this previously heavily suppressed asset class would receive substantial returns in the future.
The significant pullback experienced by TLT at present is also at a time when risky assets are in high demand, and funds tracking stocks and cryptocurrencies are attracting funds at an unprecedented speed. The Federal Reserve will announce its March interest rate decision this week, and traders are paying attention to whether sustained inflationary pressures will force Federal Reserve officials to postpone the schedule of interest rate cuts for the year.
Overall, TLT has fallen by over 3% in the past eight trading days. Although this decline is far from unprecedented, it is worth noting that this round of decline is in line with the sustained outflow of funds - which is different from the situation in the past three years, when investors continued to buy the fund despite the sharp drop wiping out about half of its value, with about $40 billion of new funds injected into the fund.
Industry analyst Eric Balchunas pointed out, "In my opinion, this is like $40 billion in funds (the total size of LTL) tactical betting that the Fed will break something, and then continuing to hope that the Fed will cut interest rates, but neither has happened. Some people are starting to withdraw, and we may see more people withdrawing."
Last week, after a series of strong economic data releases, US Treasury yields rose almost daily, and this trend continued on Monday.
Although the overall increase throughout the day was not significant, the two-year US Treasury yield hit 4.749% overnight, the highest level since December 11 last year. The yield on 5-year US Treasury bonds rose to 4.367%, the highest since November 28th last year. In addition, the 10-year US Treasury yield, known as the "anchor of global asset pricing," also rose 1.4 basis points to 4.329%.
Dave Lutz, head of ETFs at JonesTrading, said, "People are preparing for interest rates to be 'higher and longer'. US economic data continues to show economic warming and rising inflation. The Bank of Japan will end negative interest rates, which could also drive up Japanese bond yields and drag down the US bond market."
Richard Bernstein Advisors fixed income director Michael Contopoulos said, "There is still too much liquidity. Financial conditions are becoming more relaxed, unemployment rates are low, inflation is high, corporate profit growth is accelerating, and speculative activity is rampant. This is not an environment conducive to interest rate cuts."
The probability of the Federal Reserve cutting interest rates for the first time in the first half of the year is less than 50%
It is worth mentioning that as industry expectations for the Federal Reserve's interest rate cut this year continue to weaken, traders in the interest rate swap market on Monday once estimated that the possibility of a rate cut in June was less than 50%. This is also the first time people are more convinced that the Federal Reserve will find it difficult to achieve a rate cut in the first half of the year
Specifically, the pricing of the swap linked to the Federal Reserve's June meeting was once close to 5.21%, which is less than half of the current federal funds rate of 5.33%, even less than 25 basis points. This also means that the probability of a June rate cut priced by traders is less than 50%. Since July last year, the target range for the US federal funds rate has remained at 5.25% -5.5%.
Federal Reserve decision-makers have scheduled a two-day policy meeting to end on Wednesday local time. Although the industry expects the meeting to maintain the target interest rate range unchanged, the new quarterly forecasts made by Federal Reserve officials on economic and monetary policy will be highly anticipated. The December interest rate chart had predicted three interest rate cuts of 25 basis points this year. The higher than expected inflation data released since then has sparked speculation in the market that the new dot matrix will no longer be as dovish.
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, pointed out, "I believe the chart will continue to maintain the expectation of three rate cuts within the year, but if they adjust their expectations, it is more likely to lean towards two rate cuts within the year rather than four."
"I believe the most important event of this week will be the Federal Reserve meeting and the content presented in their economic forecasts to guide the market to understand their views on the performance of the first quarter economic data," said Subadra Rajappa, US interest rate strategy director at Societe Generale in France.
In the investment banking industry, Goldman Sachs economists also adjusted their forecasts for the direction of the Federal Reserve's monetary policy last weekend. Goldman Sachs strategists such as Jan Hatzius stated in a report on March 17th that they currently expect to cut interest rates three times this year, instead of the original four.
Goldman Sachs strategist wrote in the report that the main reason for the downward forecast is a slight upward trend in the inflation path. However, they still expect the first interest rate cut in June, with four cuts in 2025 and the last in 2026, with the forecast for the final interest rate remaining unchanged at 3.25% -3.5%.