Source: Wall Street News
A host of catalysts, including inflation data, auctions, and Fed comments, are expected to push U.S. Treasury rates above 2018 highs.
U.S. Treasury yields continue to rise, with yields across all maturities on track to break above 2018 highs, and several major potential catalysts will drive the move.
The first focus is on Wednesday’s April consumer price index (CPI), which economists expect will be high but should be lower than March’s 8.5% year-on-year increase. In addition, the producer price index (PPI) will be released on Thursday.
“I think it’s going to be a hot data, but not as hot as last month,” said Mark Zandi, chief economist at Moody’s Analytics, according to Bloomberg. Zandi expects headline CPI to rise this month. It rose 0.3% and rose 8.2% year-on-year.
In addition, after raising interest rates by 50 basis points as scheduled, Fed officials will speak intensively this week and attend a large number of meetings to discuss ways to deal with inflation. At the same time, the Treasury Department’s largest auction of Treasury bonds in the May-July funding season will kick off, mainly 3-year, 10-year and 30-year Treasury bonds.
10-year U.S. Treasury yields continue to rise
Last week, the 10-year Treasury yield topped 3% for the first time since late 2018. Shorter maturities, such as two-year and five-year U.S. Treasuries, surpassed their 2018 highs, which means both are back to levels seen before the 2008 financial crisis.
Rates on inflation-protected bonds (TIPS), which represent real yields, have also climbed, with the five-year TIPS yield rising more than 150 basis points in the 40 trading days to May 3, the fastest rate since 2008.
“This is a once-in-a-decade moment in capital markets,” James Camp, head of fixed income at Eagle Asset Management, said in an interview with Bloomberg. “The volatility across assets is unbelievable. We have nowhere to hide.”
In addition to this, liquidity has also started to deteriorate, making the Treasury market more vulnerable to major changes. Bloomberg’s U.S. Government Securities Liquidity Index, which measures the average yield error on bills and bonds maturing in at least a year, was near its highest level this year on Friday.
JPMorgan’s survey of U.S. Treasury investors this week found investor risk aversion was at an all-time high; neutral was the highest since March 2020.
Related factors catalyze higher U.S. bond yields
The April CPI report will show annual inflation overall fell to 8.1% from 8.5% in March, Bloomberg expects. As for core prices excluding food and energy, it is expected to fall to 6% from 6.5%.
When Fed policymakers announced a 50 basis point rate hike last week, they stated that they were “highly concerned about inflation risks.” While the short-term rate market expects the policy rate to rise to 3.25% next year from its current range of 0.75%-1%, it remains unclear how the lagging effect of the tightening on the economy will affect the direction of the policy rate.
Additionally, next week’s auctions are likely to continue this trend as the market tends to seek high coupons in new auctions. Both the 10-year and 30-year Treasury notes are on track for a coupon of at least 3%, also for the first time since 2019.
George Goncalves, head of U.S. macro strategy at Mitsubishi UFJ Financial Group, said:
Long-term U.S. Treasury yields rising above 3% make them look more attractive, but from now on, they may be a lot more attractive than thought. With the Fed unable to really address inflation with its blunt policy tools, investors want to be compensated by holding long-term bonds.
U.S. bond rates determine stock market trends
U.S. Treasury yields hit 3.13% on Friday, with rising 10-year yields weighing on stocks, especially growth and technology stocks. Last week, the S&P 500 closed at 4,123, down 0.2%, and the Nasdaq lost 1.5% for the week.
According to CNBC, Art Hogan, chief market strategist at National Securities, said that if the CPI data is in line with expectations, inflation appears to have peaked, which could bring some stability to stocks and bonds.
But U.S. bond rates will remain an important determinant of the stock market. Julian Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI, said in an interview with CNBC that people think inflation is about to peak, but he thinks the 10-year U.S. Treasury yield has not peaked, but it will not be much higher, but its The next move for the stock market will still be determined.
“The bond market dictates the direction of the stock market,” he said, predicting that the stock market is in the process of finding a low. “What we’re seeing is the stock market going up and down, and this is the beginning of the bottoming process.”
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