Market Shift: Bond Traders Rethink Fed Rate Cuts
A sudden surge in service-sector activity and job openings has led bond traders to reassess their expectations of a Federal Reserve interest-rate cut before July. This unexpected twist has lifted Treasury yields ahead of a crucial 10-year note auction, which is poised to draw the highest yield in 17 years.
Strong Economic Indicators
The latest data releases have reinforced the market’s view of a robust US economy, with rates no longer seen as restrictive. November’s JOLTS job openings unexpectedly increased, while the December ISM services index rose more than anticipated. Furthermore, a related gauge of prices paid by businesses jumped to the highest level since 2023.
Traders Scrap Wagers on Early Rate Cut
As a result, traders who had been fully pricing in another Fed rate cut by March have now scrapped their wagers, pushing back their expectations to the second half of the year. This shift in sentiment has been driven by concerns over elevated inflation risks, budget deficits, and a growing focus on achieving a soft landing for the economy.
Yields Surge Across Maturities
The impact on the bond market has been significant, with yields across maturities increasing by at least two basis points. The 30-year yield has risen more than five basis points to its highest level in over a year, while the 10-year yield has approached 4.69%, its highest level since May.
Auction Expectations
The upcoming 10-year note auction is a reopening, meaning it will create more of a 10-year note with a fixed interest rate of 4.25%. However, the auction result is expected to be noteworthy, suggesting that the next new 10-year note could debut with the highest fixed rate in nearly two decades.
Global Trend
This trend is not unique to the US, with UK 30-year yields also reaching their highest level since 1998 on Tuesday. As the global economy continues to show signs of resilience, bond traders are being forced to rethink their expectations of central bank policy.
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