At some point last week, it looked like the bond market rally was about to get going again. And then we got a turn on Thursday and Friday, and suddenly traders aren’t sure anymore that the rally would be a sustainable one. So, what’s the verdict right now as we get into the new week?
US Treasury 10-year yields (%) daily chart
Things are looking more tentative as we await key US data releases in the coming days. The big one is the consumer price inflation report tomorrow but barring any surprises, there shouldn’t be much change to the Fed outlook right now.
Markets are anticipating the first rate cut at around June to July and that is actually not too much different from two months ago. In fact, the implied rate shown on the curve right now is higher than it was back then:
Fed funds futures curve
As much as it looks like traders are kicking back after months of angst amid the rout and selling, the fundamental picture hasn’t really changed. The Fed is still on course to keep interest rates higher for longer and there is still the risk of them doing more if inflationary pressures are not receding as much as they’d like heading into next year.
However, the key factor driving yields higher is arguably the flood of supply of Treasuries. And even though the quarterly refunding announcement was not as bad as feared, the trend is still set to continue. There will be more bonds coming into the market and that will make for more waves of supply in the months ahead. The Fed and US Treasury are not going to change that.
Taking that into consideration, there will always be a counter-force to keep the selling pressure in Treasuries and prop up yields.
Right now, it looks like we might be caught in a bind between 4.50% and 5.00% for 10-year yields as seen in the chart above. But the longer it takes for this latest rally to stamp their mark and break any significant levels, it seems that there will be an increasing likelihood that we get to revisit 5% yields again at some point in the weeks ahead.
I mean, 2-year yields itself are still hanging in there at 5.05% today. If anything, that shows the latest rally in bonds hasn’t really accomplished anything too notable just yet.