Pulais: U.S. long-term bond yields are expected to continue rising, and market volatility may intensify
Arif Husain, the head of fixed income at PIMCO, maintains a bearish stance on U.S. Treasury bonds. He pointed out that due to competition from other sovereign debts and financing demands from data centers, U.S. bond yields need to rise and the curve must steepen to attract funds. The limited forward guidance from the Federal Reserve and the potential for balance sheet reduction may exacerbate volatility, while momentum trading could push yields higher. If economic data is strong or oil prices rise, there is still room for long-end yields to increase
According to the Zhitong Finance APP, Arif Husain, Global Head of Fixed Income and Chief Investment Officer of T. Rowe Price, stated that he remains bearish on U.S. Treasury bonds. With other sovereign bond issuers competing for funds, coupled with the substantial financing needs involved in data center investments, the overall yield on U.S. Treasury bonds needs to rise. Additionally, the yield curve must steepen further to attract sufficient funds to finance the fiscal deficit. This adjustment will not occur in a linear manner. The Federal Reserve is providing limited or no forward guidance, and the reduction in the size of its balance sheet may exacerbate market volatility, making the path of rising yields uncertain. Momentum trading may also spread to the bond market. Following the recent dominance of momentum factors in other markets, this force may further intensify downward pressure on bond prices and push yields higher.
Before the Federal Reserve fully gains the market's trust, long-term yields still have room to rise in the short term. If economic data is hot or oil prices approach $100 per barrel again, the increase in yields may be even larger. It is expected that market pressures may ultimately force the Federal Reserve to respond, which could create opportunities for increasing duration positioning. The key is to what extent the Federal Reserve Chair will maintain limited forward guidance as market pressures rise.
Before the July Federal Open Market Committee (FOMC) meeting, the likelihood of a rate hike by the Federal Reserve is very low, and the market lacks sufficient rationale to expect authorities to raise rates in real-time. Compared to the rate decision itself, the market movements before and after the meeting have conveyed more important signals, especially after the announcement of the rate decision, when long-term U.S. Treasury bonds were sold off. Although maintaining interest rates aligns with market consensus, the reaction of U.S. Treasuries reflects that the bond market hopes the Federal Reserve will more forcefully demonstrate its commitment to curbing inflation, with real-time rate hikes seen as the clearest action. It seems the market must believe that the Federal Reserve has the ability to stabilize inflation expectations, and the current "Goldilocks" environment of robust economic growth and relatively controlled inflation is likely to continue.
In the absence of clear forward guidance, if the market continues to test the Federal Reserve's policy resolve, it is currently difficult to determine what factors could act as a brake. Unless investors see clear signals from policy actions, economic data, or clearer policy communication that sufficiently demonstrate the Federal Reserve's credibility, the long end of the U.S. Treasury yield curve may continue to be under pressure.
Federal Reserve Chair Waller has indicated a preference for reducing the Federal Reserve's balance sheet and providing less forward guidance, which may lead to an increase in both medium- and long-term implied volatility and actual volatility. Volatility may initially emerge in the interest rate market and then spread to the credit market and even the stock market
