In a surprising turn of events, US Treasury yields experienced a sharp increase, mirroring a global bond selloff as traders adjusted their expectations for deep interest-rate cuts from major central banks in 2024. The benchmark 10-year yield surged by as much as nine basis points to 3.97%, while German bund yields of similar maturity jumped nine basis points to 2.11%, reaching the highest level in over two weeks. The equivalent UK rate also saw a significant rise of 15 basis points. The short-dated Treasuries led the selling pressure, maintaining the bulk of their yield rise in late New York trading. The Bloomberg Dollar Spot Index recorded its most substantial one-day gain since March 15.
These market movements reflect growing skepticism regarding whether policymakers will implement the extent of monetary easing already priced in by money markets. Despite indications from central banks that they may have completed the final hikes of the current cycle, there is a reluctance to prematurely abandon the fight against inflation. The surge in corporate debt issuance also contributed to the downward pressure on bonds, particularly following their robust performance leading up to the year-end.
Gennadiy Goldberg, Head of US Interest Rates Strategy at TD Securities, pointed to the supply story behind the market movement, attributing it to the announcement of several corporate deals. However, he noted that, on a broader scale, markets are still trying to find their footing ahead of key economic data releases.
Economic data scheduled for the week includes readings on the job market, monthly payroll figures, and minutes from the Federal Reserve’s meeting last month, during which policymakers signaled a shift towards more rate cuts.
US money markets currently price around 150 basis points of Fed easing in 2024, about seven basis points less than the previous week’s closing. The job market’s moderate pace of hiring, coupled with a resilient labor market, supports the view that the economy will continue expanding in 2024, albeit at a slower rate.
For the European Central Bank, traders anticipate approximately 158 basis points of easing in 2024, representing a slight decrease from the previous week. While euro-area inflation has retreated, central bank officials remain cautious, foreseeing the possibility of inflation ticking up in the coming months. The market is attentive to consumer price growth data for the region scheduled for release on Friday. Concerns over the conflict in the Middle East have also contributed to fears about rising oil prices.
Emmanouil Karimalis, a rates strategist at UBS Group AG, suggested a potentially bearish tone in the market, emphasizing that central banks, including the ECB, have not signaled an all-clear.
Societe Generale strategists’ analysis indicates that long-maturity yields typically peak around the last rate hike before declining by an average of 100 basis points over the next year or so. However, at the end of 2023, bund yields experienced a substantial drop, leaving investors with minimal buffer protection from volatility.
Despite the greenback’s recent rebound, the Bloomberg dollar gauge gained more than 0.7% on Tuesday. Technical analysts suggest that the currency’s oversold condition, coupled with a drop below the 14-day relative strength index of 30 early last week, indicated a reversal was imminent.
While market expectations currently anticipate Fed rate cuts in 2024, analysts caution that a moderation in these expectations is likely, potentially leading to a strengthening of the USD before a potential softening towards the end of 2024. Bloomberg’s Markets Live team anticipates a reversal in the dollar’s recent gains, projecting a more aggressive and potentially earlier rate-cutting stance by the Fed compared to other major central banks.
