Treasury bonds are in high demand
Treasury bonds are in high demand
2022.11.27 08:34
Treasury bonds are in high demand
Budrigannews.com – Traders bet that the longer-term trajectory for interest rates will be down even as the Federal Reserve is still busy raising its policy rate, and the bond market is zeroing in on a US recession next year.
Even though long-dated Treasury yields are already below the Fed’s overnight benchmark range, which is currently 3.75 percent to 4%, there is still an additional percentage point of central bank increases that have already been priced in for the upcoming months. There has also been activity in the options market, which suggests that some people are protecting themselves from the possibility that policy rates will eventually fall by half from where they are now.
Investors have been buying bonds rather than waiting for definitive economic evidence that this year’s frantic monetary tightening will result in recessionary conditions in 2023, a position supported, among others, by Pacific Investment Management Co.
Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities, stated, “Fed policy is dynamic and they are still signaling they are going to go higher.”However, the market appears to be more at ease now that the Fed has reached its goal.
The rate on 10-year and 30-year securities fell below the lower bound of the Fed’s overnight range this week as a result of demand for longer-tenor Treasuries. The most pronounced yield curve inversion in four decades has intensified as front-end rates have remained relatively stable, a widely watched sign of future economic trouble.
Faranello stated, “The narrative about recession indicators is strong, but from the Fed’s perspective, it is part of the solution.”
The US economy, and in particular the labor market, has so far demonstrated that it is quite resilient in the face of Fed rate increases, which are made with the intention of attempting to reduce high inflation that appears to be persistent. As a result, investors will pay close attention to the monthly jobs report on Friday to see if it shows signs of cracking or if it could lead the Fed to change its policy direction.
They will carefully evaluate the statements made by Fed Chair Jerome Powell and his colleagues, who will speak publicly for the final time next week before entering the customary blackout period prior to the Fed’s policy meeting on December 13–14. Officials have been firm in reiterating the need for policy rates to rise above current levels, despite the fact that the minutes of their most recent meeting indicated that they are likely to slow the pace of tightening soon.
Given expectations of a gradual slowing of policy tightening from here amid a conviction that inflation has peaked and job creation is slowing, Fed jawboning may prove less effective than the tone of the data at this stage of the cycle.
As traders navigate a variety of top-tier data in the coming week, including the jobs report, there could be some turbulence for Treasuries due to the scale of bullishness in the long-end of the bond market right now and the depth of the yield curve inversion.
A predicted contraction in the ISM manufacturing index could help recession bets, and the Fed’s preferred inflation gauge, personal consumption expenditure, will show how things are changing in the personal income and spending report.Additionally, figures on the number of open positions are scheduled to be made public.
The effective fed funds rate is expected to rise to around 5% by the middle of next year, according to swap-market pricing, before a pullback that lowers it by more than half a percentage point by early 2024. Trades this week tied to Secured Overnight Financing Rate futures focus on the possibility of a decline to 3% or even 2% by either the end of 2023 or early 2024. However, some are betting on a much sharper reversal.
However, there is some opposition to the current bond market consensus regarding the Fed, the economy, and, of course, the return of low inflation in the coming year. This week Goldman Sachs Gathering Inc. said the 10-year will exchange above 4% through to 2024 as assumptions for rate cuts one year from now are run by the economy not entering a downturn and expansion staying high.
However, that is far from the main view. Pricing on the market suggests that, despite the fact that the Fed has not yet changed its policy, many investors are increasingly focusing on the possibility of an economic downturn rather than the threat of unrelenting Fed hikes.
