Bond traders seize on 4% yield, confident Fed rate cut is imminent

(Bloomberg) — Traders betting on bond gains in 2024 are unfazed by the recent pullback, which they see as an opportunity to take advantage of rising yields before the Federal Reserve starts driving rates lower.

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That dynamic was on display on Friday, as bond prices fell after the Labor Department reported an unexpected acceleration in job growth last month, but an influx of buyers kept the 10-year Treasury yield near 4.1%, where it was in mid-December. the highest level since then, so the sell-off was limited.

The rebound highlights a clear shift in sentiment over the past two months, with investors increasingly confident that the bond market is firmly recovering from its worst downturn in decades, despite data showing continued strength in the economy. Yields remain well below their October peak as traders bet the Federal Reserve could begin easing monetary policy as soon as March.

Priya Misra, a portfolio manager at J.P. Morgan Asset Management, said the 10-year note “anywhere between 4% and 4.2% is a buy,” noting that yields were at the upper end of that range before the last Fed meeting . 4.2% To break this, we must either raise rates again or cancel cuts across the board. “

A bond market rally in the final two months of 2023 ended some of the worst losses in decades, pushing Treasuries higher this year and reinforcing belief that yields will not retest previous peaks. Realizing that yields could move higher if incoming data changes expectations for the Fed’s likely path, some large investment firms have been viewing recent declines as a good time to buy.

Strategists at TD Securities told clients on Friday that while bonds could still fall further in the short term, they still believe the labor market is cooling and the 10-year Treasury yield will reach 3% by the end of 2024.

Kevin Flanagan, head of fixed income strategy at WisdomTree, said: “The bond market is not ready to abandon its optimistic assessment of the Fed cutting interest rates this year. The buy-the-dip narrative will remain and something will need to be done.” More than one jobs report has changed that. “

Not all areas of the bond market are seen as immune from losses, with potential policy-sensitive two-year bonds at risk of repricing if traders further withdraw bets on rate cuts due to a strong economy. A test will come next week with the release of December consumer price index data and a $37 billion 10-year bond auction, which will provide key demand indicators. Next week’s public appearance by New York Fed President John Williams is also in the spotlight. He is one of the latest officials to resist market expectations for a sharp rate cut early this year.

But the Fed has kept policy steady since July, and minutes of its December meeting released on Wednesday showed policymakers expected they might start to ease policy this year.

Read more: Fed expects rates to remain high for some time, plans rate cuts in ’24

However, the extent of inflation will depend largely on whether inflation continues to subside. Economists surveyed by Bloomberg expect consumer prices to rise 3.2% annually in December, up from 3.1% a month ago. But the core indicator, which is a better gauge of underlying stress because it excludes volatile food and energy prices, is expected to slow to 3.8% from 4%.

While still above the Fed’s 2% target, the pace has dropped significantly. In addition, on a six-month annualized basis, the Fed’s preferred indicator rose only 1.9% in November, marking the first time in more than three years that the indicator fell below the Fed’s target level.

“As the year progresses, the 10-year rate could fall below 3.5%, depending on lower inflation and slightly weaker growth,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments. “The trend of lower inflation and slower growth means the Fed has an accommodative framework, which is likely to occur in the first half of the year.”

According to Bloomberg…

“Treasury yields are likely to move higher in the coming months as the market prices in some of the rate cuts that are already priced in, but we continue to believe yields will move lower across the curve by year-end in a larger bull steepening trend.”

—Ira F. Jersey and Will Hoffman, BI Strategists

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What to see

  • Economic data:

    • January 8: New York Fed’s one-year inflation forecast; consumer credit

    • January 9: NFIB small business optimism; trade balance

    • January 10: MBA mortgage applications; wholesale inventory

    • January 11: Consumer Price Index; Initial Jobless Claims; Real Average Hourly and Weekly Earnings; Monthly Calendar

    • January 12: Producer Price Index

  • Fed calendar:

    • January 8: Raphael Bostic, President of the Federal Reserve Bank of Atlanta

    • January 9: Michael Barr, Vice Chairman of Supervision, delivers a speech on bank supervision

    • January 10: John Williams, President of the Federal Reserve Bank of New York

    • January 12: Neel Kashkari, President of the Federal Reserve Bank of Minneapolis

  • Auction Calendar:

    • January 8: 13th and 26th week bills

    • January 9: 42-day cash management note; 3-year note

    • January 10: 17-cycle notes and 10-year notes reopen

    • Jan. 11: 4-week, 8-week notes; 30-year bond reopens

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