As U.S. economic growth holds up better than expected, markets have started to dial back expectations for rate cuts and yields have been rising across curve; bond markets around world following lead of U.S. Treasuries
@SPDJIndices pic.twitter.com/2PMxi4jfDb— Liz Ann Sonders (@LizAnnSonders) October 22, 2024
The bond market experienced a significant sell-off as traders reassessed the trajectory of interest rate cuts from the Federal Reserve. Strong economic data and the potential for a Trump victory have contributed to rising interest rates, leading to higher bond yields and lower prices. In the past few weeks, stronger-than-expected economic indicators have forced traders to reassess their outlooks.
October Philly Fed Services index up to +6 vs. +4.1 est. & -6.1 prior … strongest reading since May 2022 pic.twitter.com/H1uGvdKtsT
— Liz Ann Sonders (@LizAnnSonders) October 22, 2024
The 10-year US Treasury yield surged to 4.22% on Tuesday, a notable increase from the 3.62% level observed in mid-September following the Fed’s substantial rate cut. As a result, the Bloomberg Aggregate Bond Index has dropped by 3% since mid-September, while long-term treasuries, as measured by the iShares 20+ Year Treasury Bond ETF, declined by approximately 9% over the same period. Investor sentiment shifted with recent economic data showing stronger-than-anticipated performance.
While far from the only influence, interest rate developments can—and do—impact currency moves. This appears to have been the case for the last few months, with US government bond yields and the dollar index moving first down and then up.
#economy #markets #currency… pic.twitter.com/CjEY6i6jfz— Mohamed A. El-Erian (@elerianm) October 23, 2024
A robust September jobs report highlighted the addition of 254,000 jobs, which significantly reduced the likelihood of another 50 basis point cut from the Federal Reserve. This jobs data, coupled with solid retail sales, slightly higher-than-expected inflation, and the Atlanta Fed’s forecast of 3.4% GDP growth for the third quarter, has led markets to reconsider the Fed’s urgency in cutting borrowing costs. Torsten Sløk, chief economist at Apollo, stated in a note that the Federal Reserve is now likely to maintain current interest rates at the upcoming Federal Open Market Committee meeting.
With the move up in government bond yields continuing this morning (please see below for the US 10-year), analysts are adding to the list of contributors which now includes US growth, debt and deficits, election prospects, eroding foreign demand, etc…#economy #markets #bonds pic.twitter.com/gXcdBHWrK6
— Mohamed A. El-Erian (@elerianm) October 21, 2024
“The US consumer continues to do well, driven by solid job growth, strong wage growth, and high stock prices and home prices,” Sløk remarked.
Bond yields driven by strong data
He emphasized the importance of the upcoming October jobs report as a crucial indicator.
Federal Reserve officials have generally signaled a cautious approach. San Francisco Fed President Mary Daly indicated that no current information suggests halting the process of reducing interest rates. Similarly, Minneapolis Fed President Neel Kashkari expected “modest cuts over the next quarters,” while Dallas Fed President Lorie Logan and Kansas City Fed President Jeff Schmid both endorsed a gradual approach.
Meanwhile, a potential Trump victory next month is seen as inflationary due to his proposed policy of universal tariffs. His tariffs are a key part of Trump’s economic proposals, which he argues will reduce costs, though economists caution that taxes on imports would ultimately be passed on to consumers. A resurgence in inflation could prompt a more hawkish stance from the Fed, potentially reversing rate cuts or even raising rates to counter rising prices.
Capital Economics noted that a Trump win could lead to a significant rally for the dollar, driven by expectations of higher tariffs and interest rates. Experts believe that such an administration would bring substantial impacts on inflation and Fed policy. The bond market remains on edge as traders, economists, and policymakers navigate these dynamic conditions with significant future implications.
