The bond market faces a critical juncture as its bold bet on substantial US interest-rate cuts in 2024 awaits validation from the Federal Reserve. Investors, who have heavily positioned themselves for a rate cut of over 100 basis points, eagerly anticipate Federal Reserve Chair Jerome Powell’s remarks and the release of the central bank officials’ dot-plot outlining the trajectory of US monetary policy.
While recent positioning data indicates a shift to a more neutral stance on Treasuries, the market remains deeply invested in the expectation of a Fed pivot towards lower interest rates. Any deviation from this expectation, especially if the Fed signals a higher-for-longer rate scenario, could trigger a rapid unwinding of bets, causing widespread market discomfort.
David Lebovitz, Global Market Strategist at JPMorgan Asset Management, highlighted on Bloomberg Television that the market could handle a shift in the timing of expected rate cuts. However, a hawkish signal from the Fed indicating a departure from anticipated cuts might lead to market turbulence.
Traders, predominantly positioned for a rate cut, face heightened risk on Wednesday if Powell strongly opposes the current market sentiment. Benchmark two-year yields, closely linked to the outlook for US central-bank rates, experienced fluctuations, reaching as low as 4.63% before rebounding to 4.73%, up approximately 2 basis points for the day.
The market exhibited nervousness throughout Tuesday, with government data revealing a 0.3% increase in the core consumer price index (CPI) last month. The core CPI, excluding food and energy costs, advanced 4% year-on-year. This data, coupled with concerns about the market’s ability to absorb increased government debt supply, contributed to the cautious trading atmosphere.
Long-term yields saw a slight decrease after a 30-year bond auction demonstrated solid demand, alleviating worries about the market’s capacity to handle growing US government debt. Ten-year Treasury yields were down 3 basis points at 4.20%, and 30-year rates decreased about 2 basis points to 4.30% by the end of the day.
The auction of 30-year debt at a yield of 4.344% showed improvement from the previous month, with a bid-to-cover ratio of 2.43, up from 2.24 in November. Despite the volatility, some investors find yields attractive, considering their relatively high levels and the widespread belief that the Fed’s aggressive tightening cycle is likely over.
Rob Waldner, Head of Macro Research at Invesco, expressed on Bloomberg Television that the market is navigating a path of either slow or quick cuts next year, both of which are perceived favorably for bonds in a scenario of slow growth and disinflation.
