Another change! The Fed's expected interest rate cut within the year is less than 50 basis points
Last Friday's non-farm payroll report prompted traders to reassess the Federal Reserve's monetary policy outlook, leading to an increase in US Treasury yields. The market's expectations for a rate cut by the Fed in November have decreased, with the implied rate cut at the end of the year falling below 50 basis points for the first time. Goldman Sachs strategists expect US Treasury yields to gradually rise, reflecting doubts about the Fed's policy. Short-term Treasury performance has been poor, with the yield curve nearing inversion, and traders are awaiting speeches from Fed officials for more clues
Last Friday's surge in non-farm payrolls forced traders to reassess the Federal Reserve's monetary policy outlook. U.S. Treasury bonds continued to plummet on Monday, with the 10-year bond yield rising 4 basis points to 4.01% and the 2-year bond yield rising 8 basis points to 4%.
These fluctuations reflect doubts about the Fed's next move. The swap market no longer fully prices in a 25 basis point rate cut at the Fed's November meeting, and the implied rate cut by the end of the year is now below 50 basis points for the first time since August 1.
Goldman Sachs strategists, including George Cole, wrote in a report, "We expect U.S. bond yields to be higher, but we expect an adjustment to be gradual. The strength of the September non-farm payrolls report may accelerate this process, with a new debate on policy constraints leading to changes in expectations for the potential rate cut by the Fed."
European bonds followed the decline in U.S. bonds. The yield on Germany's 10-year bond rose 4 basis points to 2.25%, reaching its highest level in over a month, while the UK bond yield rose 6 basis points to 4.19%.
The sell-off in U.S. bonds following the release of employment data last Friday is just the latest twist in the past year. Bond traders have repeatedly adjusted their expectations for the U.S. economy and Fed policy. Last week, the significantly better-than-expected U.S. service sector activity caught them off guard, further questioning the theory that the deterioration of the U.S. economy is faster than expected.
Short-term U.S. bonds, which are more sensitive to monetary policy, performed poorly, putting a key part of the yield curve on the brink of inversion once again. Historically, longer-term bond yields are usually higher, but this norm has been broken for nearly two years after the Fed's aggressive rate hikes. Last month, the yield curve began to normalize, with the yield on the U.S. two-year bond falling below that of the 10-year bond.
The yield spread between the U.S. two-year and 10-year bonds is once again close to 0.
Traders are awaiting a series of speeches from Federal Reserve policymakers for further clues on the interest rate path. Minneapolis Fed President Kashkari, Atlanta Fed President Bostic, St. Louis Fed President Mester, and Fed Governor Bowman are scheduled to speak at different events on Monday. Fed Chairman Powell has previously indicated that officials' forecasts and their rate decision in September point to a 25 basis point rate cut at the last two meetings of the year.
Later this week, U.S. inflation data will also be closely watched. According to economists' consensus, the Consumer Price Index (CPI) for September is expected to rise by 0.1% month-on-month, the smallest increase in three months TS Lombard Managing Director Dario Perkins said, "It is not necessary to have an economic recession to achieve a tolerable level of inflation, so the Federal Reserve is easing policy instead of waiting for a real economic weakness. By now, everyone should have realized that the Fed's rate cuts are just precautionary."