U.S. bonds are falling! Societe Generale: U.S. bond interest rates have not peaked

U.S. Treasury bond prices fell on Tuesday as U.S. Treasury rates rose on inflation concerns. Yields on 3-year, 5-year, 7-year and 10-year Treasuries have all risen by at least 10 basis points after falling for most of the past three weeks. Adding to Tuesday’s volatility, the U.S. government bond market caught up with other financial markets after it was closed for Memorial Day on Monday.

U.S. sovereign bond yields climbed as oil prices rose to two-month highs, while European inflation data for May beat economists’ expectations. Hawkish comments from Fed Governor Christopher Waller added to the slide in U.S. bond prices.

German Bunds and other European bonds fell on Monday after German inflation rose to a record high, adding to the urgency for the European Central Bank to pull out of crisis-era stimulus. Inflation in Spain also unexpectedly accelerated.

Meanwhile, Fed Governor Waller advocated for continued rate hikes until price pressures subside. He said: “I support a policy of 50 basis points more in several meetings. In particular, I will not cancel my plan to support a 50 basis point hike until I see inflation falling closer to the 2% target. “

“We still need to fully acknowledge that inflation has become self-supporting, and bringing it back under control will not be the case,” Sonal Desai, chief investment officer of Franklin Templeton’s fixed income division, wrote in a note. More difficult and painful than the central bank would like. The Fed’s tightening cycle will be longer and policy rates and bond yields will have to be higher than the market currently expects.”

Despite Tuesday’s sell-off, U.S. 10-year yields are still about 40 basis points below their recent highs hit earlier this month, as investors start to see value in fixed-income assets again. Investors are torn between rising inflation and tighter monetary policy, which is aimed at slowing inflation but is also increasingly seen as a threat to the economy.

In addition, the plunge in U.S. Treasury prices also appeared to be driven by month-end portfolio rebalancing. Such inflows could push stocks to outperform the broader market by 1% to 3% in the final week of May, JPMorgan estimates, as pension funds shift their allocations from bonds to stocks.

U.S. Treasury yields in May will be their first monthly rise since November. The S&P 500 rose 0.6%.

“I’m not entirely convinced that the 10-year Treasury yield has reached a cycle high,” Kit Juckes, a strategist at Societe Generale in London, wrote in a client note. The benchmark rate will then rise by another 100 basis points.”

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