Bond strategists believe that the yield of US Treasury bonds will fall further. Although traders are about to underwrite a large amount of new bonds, they still insist that the Federal Reserve will resume cutting interest rates more than half a year after it paused raising interest rates.
Currently, a slight majority of strategists expect that by the end of this month, the longest-duration and highest-risk long-term bonds will witness another round of selling. People are worried that by 2034, President Donald Trump’s tax cuts and spending bill will add trillions of dollars to the already high debt of 36.2 trillion US dollars. Coupled with the marginal game over fiscal policy, many US asset holders have pulled out.
The constantly rising “term premium” (that is, the compensation demanded by investors for holding long-term bonds) makes the market more vulnerable ahead of the upcoming Treasury bond auctions, especially for foreign investors.
Colin Martin, a fixed income strategist at Charles Schwab Financial Research Center, said, “The amount of debt we need to issue keeps rising, and it seems that neither side in Washington really has a plan to cut the deficit and address our fiscal situation.” This will put pressure on the long end of the yield curve. “We need to see a slight increase in the yield to attract marginal buyers.”
Over the past two months, yields on global sovereign bonds have mostly risen simultaneously. In April, the rapid sell-off of the 10-year benchmark US Treasury bond pushed its yield up by approximately 60 basis points. Since then, the yield rate (which rose as the price fell) has tended to stabilize and fluctuated around 4.50%.
A survey conducted by Reuters among nearly 50 bond strategists (mostly from traders and sell-side institutions) from June 6th to 11th showed that their median forecast was: The yield on 10-year Treasury bonds will decline slightly by 13 basis points to 4.35% within three months and fall from the current 4.48% to 4.29% within six months. Although they predict that yields will fall, more than half of the strategists have raised their expectations compared to the May survey, and many have pointed out the risk of rising yields.
Martin of Charles Schwab added, “The 10-year Treasury yield is likely to consolidate within the range of 4% to 4.50% for some time and may even rise slightly further, especially considering concerns about the deficit.” As the Federal Reserve cuts interest rates one or two more times before the end of the year, short-term yields are gradually declining, and the yield curve should continue to steep.
Surveys show that the yield on two-year Treasury bonds, which are more sensitive to interest rates, is expected to fall by 17 basis points to 3.85% within three months and to 3.73% by the end of November, with a slightly larger decline.
Most economists surveyed by Reuters predict that the Federal Reserve will cut interest rates twice or less this year, while interest rate futures are currently priced at twice.
The demand for the ongoing three-year Treasury bond auction is slightly light, but the market will pay more attention to the longer-term 10-year and 30-year Treasury bonds to be issued this week.
Mark Heppenstol, chief investment officer of Pennsylvania Mutual Asset Management, said, “Given the recent market performance and the yield pressures we have seen, the long end of the yield curve seems to be most vulnerable to supply and demand imbalances, which can lead to higher interest rates.” There has been some volatility at the long end of the yield curve. Given all the upcoming supplies, the supply of 30-year Treasury bonds is the biggest question mark this week. But this does not mean that the issuance of three-year and ten-year Treasury bonds will definitely be easy.
A survey of currency strategists by Reuters last week showed that nearly 90 percent of the majority expect demand for dollar-denominated assets to decline this year, and Europe is widely regarded as the biggest beneficiary.
Chris Igor, chief investment officer of Core Investments at AXA Investment Management, said: “In terms of bonds, European investors focusing on the US market usually hedge against exchange rate risks, but now this cost has become very high.” Therefore, on the basis of hedging, US Treasury bonds are no longer so attractive to European investors.
There is a lot of discussion about defense spending and infrastructure construction, but you know, “Let me see where the money is!” — We haven’t really seen a significant increase in investment opportunities yet.
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