The US Treasury yield continued to mostly rise on Tuesday, as investors are waiting for key GDP and inflation data to be released later this week, which may affect the Federal Reserve's decision on when to start a rate cut cycle. At present, the interest rate market's expectation of the Federal Reserve's interest rate cut in March is still continuing to cool, and a latest industry survey shows that the most likely window for interest rate cuts may even wait until June
Market data shows that overnight medium - and long-term US bond yields have continued their upward trend since the beginning of the year. As of the end of the New York session, the 5-year US Treasury yield rose 1.1 basis points to 4.045%, the 10-year US Treasury yield rose 2.1 basis points to 4.131%, and the 30-year US Treasury yield rose 4.2 basis points to 4.365%. The yield on the 2-year US Treasury bond fell 2.2 basis points to 4.378% in the same day.
Affected by the sell-off of European government bonds for supply response and the launch of a series of US treasury bond bond issuance, the yield of US 30-year treasury bond bonds once approached the highest level in the year in the middle of Tuesday's session.
The yield of multiple term US Treasury bonds has been rising since the opening of Tuesday in New York, following the previous trend of Japanese bonds. After the speech of Bank of Japan Governor Yoshio Ueda, Japanese treasury bond were sold off in succession.
US bond yields are also under upward pressure from the issuance cycle. First, the auction of two-year treasury bond reached the highest level in history on Tuesday, and then the issuance of five-year and seven-year treasury bond in the next two days.
The US Treasury Department auctioned US $60 billion of two-year treasury bond bonds on Tuesday at a winning interest rate of 4.365%. The Ministry of Finance increased the auction size of two-year treasury bond this time. In contrast, the auction size in December was $57 billion, and that in November was $54 billion. Although some investors had feared that the increase in the issuance of treasury bond would lead to the increase of the high risk premium, in fact, the price of treasury bond had hardly fluctuated.
On Wednesday, the US Treasury Department will also auction US $61 billion of five-year treasury bond bonds, and on Thursday, US $41 billion of seven-year treasury bond bonds will be auctioned.
The US Treasury Department will release an overall quarterly financing estimate next Monday and details on increasing the auction scale on January 31st. Vail Hartman, a US interest rate strategist at BMO Capital Markets, said that the Treasury may increase the auction size of most of the annual bonds, except for the 20-year bonds.
Since the government announced higher than expected borrowing demand for the third quarter in July last year, leading to bond selling, the quarterly refinancing report of the US Treasury Department has been closely watched. Tom Simons, money market economist of Jefferies Financial Group, said, "Who will buy these treasury bond? It is expected that by the end of this month, we may encounter some supply side resistance."
The survey predicts that the most likely window for the Federal Reserve to cut interest rates is in June
In terms of predicting the direction of interest rate paths, as Federal Reserve officials counterattacked market expectations of the Fed cutting interest rates by up to 150 basis points this year before the silence period last week, the probability of the Fed cutting interest rates in March has been priced by the interest rate futures market at less than 50%, down from over 80% a month ago.
Kevin Flanagan, head of fixed income strategy at WisdomTree, said that the recent bond rally may not be perfectly priced, but it has already digested a lot of good news and is now prepared for disappointment. The treasury bond bond market seems like a hammer in the east and a hammer in the west every week, but you should know that this is an attempt to extract some of the air from the balloon. Last week, the Federal Reserve suppressed market expectations of interest rate cuts. This has played a great role in resetting the yield of treasury bond in 2024.
According to a latest survey released by industry media on Tuesday, most interviewed economists said that the Federal Reserve will wait until the second quarter to cut interest rates. The likelihood of a rate cut in June is greater than in May, and the overall rate cut this year is expected to be lower than the market's current forecast.
In this survey conducted from January 16th to 23rd, all 123 interviewed economists predicted that the FOMC would maintain the federal funds rate at 5.25% -5.50% during the interest rate meeting on January 31st. Most (86) respondents indicated that interest rate cuts will begin next quarter.
Among these respondents, nearly 45% (55) bet that the first rate cut will be in June, while 31 are expected to be in May. Only 16 respondents believe that the Federal Reserve will cut interest rates in March. Others predict that the Federal Reserve will only begin cutting interest rates in the second half of this year to cope with cooling inflation.
"We still expect FOMC to maintain a cautious stance in the near future, even as consumer price conditions continue to improve, as the Federal Reserve wants to ensure that recent inflation (pullback) progress is sustainable," said Oscar Munoz, Chief US Macro Strategist at Dow Securities
The survey results also show that compared to the latest pricing in the interest rate market, economists are more in favor of the Federal Reserve's own dot matrix predictions.
The median survey forecast shows that the benchmark interest rate is expected to drop to 4.25% -4.50% by the end of this year, the same as the previous month's survey. Nearly 60% (72 respondents) expect a rate cut of 100 basis points or less this year, lower than current market expectations (over 125 basis points).
Among the 41 economists who answered additional questions, 30 respondents believed that the risk of a significant recovery in inflation over the next six months was low, while 11 believed that this risk was high. Due to the increasing likelihood of the US economy avoiding recession, economists generally believe that the Federal Reserve has little reason to cut interest rates early.
Philip Marey, Senior US Strategist at Rabobank, said, "The minutes of the December meeting indicate that the Federal Reserve has not yet discussed in detail the rate cut cycle. Unless the FOMC is concerned about an economic recession, we expect the first rate cut to be in June."