European bond yields are leading the drop today, with 10-year German bond yields now down over 5 bps to 2.28% – its lowest in six months. It looks like Schnabel’s remarks earlier here is reverberating somewhat as we get the session underway. Meanwhile, 10-year Treasury yields are also marked down by 5 bps to 4.235% on the day.
All of this is keeping the Japanese yen underpinned, with USD/JPY down 0.3% to 146.80. The dollar may be lower there but it is sitting higher against the rest of the major currencies bloc as there looks to be some risk aversion creeping in. Equities are down, with S&P 500 futures lower by 0.4%, and alongside lower yields, it points to a retreat in risk trades for now.
Going back to the bond market, the retreat in yields still points to some heavy pushing and pulling going. However, traders have already priced in a considerable amount of rate cuts for next year. That is something to keep in mind as we look towards the weeks ahead as we might have already reached a maximum point.
I mean, right now we’re even starting to see traders price in more than 80% odds of the ECB cutting rates in March? That’s just four months away. Is anyone that confident that the inflation fight is over? That’s not to mention the ~140 bps worth of rate cuts set for next year. Meanwhile, traders are also seeing ~125 bps worth of rate cuts for the Fed as well.
It could be a case of market players overstepping here and if so, the backlash and retracement is going to be a sharp and painful one. Some food for thought from last week here.