The selling in bonds is continuing as yields are gradually popping higher in European morning trade. This wasn’t supposed to be part of the script for 2024, if you look back at what traders were positioning for back in November and December last year. Yet, here we are now as Treasury yields are reversing a large chunk of that move.
US Treasury 10-year yields (%) daily chart
For some context, we’ve seen a significant pullback in terms of Fed rate cut pricing over the last few months. And that is what is being confirmed by the action in the bond market here.
The first rate cut was initially set for March, then moved to June. Now, it is pushed to September and even that is not necessarily a given if you take the inflation outlook into consideration.
In terms of how market pricing has shifted specifically, we saw traders price in 156 bps worth of rate cuts for this year at the end of December last year. Currently, traders are only pricing in a measly 42 bps worth of rate cuts.
So, where do we go from here?
It all comes down to the inflation picture for the most part. If inflation continues to remain stubborn, there is still room for a further pullback in pricing. And that means a higher dollar with yields also to stay underpinned until the narrative changes.
For this week, a further push higher in Treasury yields will keep USD/JPY in focus. The pair is trading up 0.2% to 154.55 now with a close watch on the 155.00 mark. That might be a potential intervention trigger point for Japan.