On Tuesday, July 6, investors began to bet on a gradual slowdown in the U.S. economic recovery trend as the newly released U.S. June ISM services data fell farther than expected from a record high, sending long-end U.S. bond yields sharply lower collectively.
As of midday, the 10-year U.S. bond yield was the deepest down 8 basis points during the day, with the daily low once falling through 1.35% for the first time since Feb. 24, refreshing the four-and-a-half-month low since Feb. 21.
The 30-year U.S. bond yield is back below the 2% mark for the first time since June 21, with the deepest intra-day drop of 7.8 basis points to a daily low of 1.972%, the lowest in a month and a half.
The financial blog Zerohedge pointed out that the U.S. bond yield curve is flatter today, increasingly highlighting signals of early stagflation. Long-end yields have fallen to their lowest levels since February this year, with three-month and two-year U.S. bond yields falling by anywhere from 0.3 to 1.4 basis points.
U.S. economic recovery or slowdown, unable to support the long end of the U.S. bond rates
The market generally believes that the recent U.S. economic data showed a downward trend from the high level and failed to support the long-end U.S. bond rates.
The U.S. ISM Services Index recorded 60.1 in June, off the record high of 64 set in May and significantly below market expectations of 63.5. The employment sub-index returned to the contraction range and hit a six-month low, while the new orders and business activity indices both fell back.
Meanwhile, the U.S. non-farm payroll unemployment rate rose to 5.9% in June, compared with 5.6% expected, as announced last Friday. At the time, an analysis said that the labor force participation rate remained flat, overlaid with a rebound in the unemployment rate, or showed that the sustainability of the improvement in U.S. employment data was not strong.
All of this seems to suggest that not only inflation may be temporary, but even some of the economic growth is temporary, with investors believing that most of the recovery has already happened, according to Kathy Jones, chief fixed income strategist at Charles Schwab, as quoted by financial media CNBC. Short-end U.S. bond yields are largely flat, while reflecting that investors are still betting that the Fed will cut some of its asset purchases (taper) as soon as this year.
However, Goldman Sachs chief economist Jan Hatzius said in a research note released on Tuesday that the risk of an economic overheating outbreak in the United States is low and the Fed is not expected to announce a QE cut before December this year. he also expects that with the process of reopening the economy basically over and the fiscal stimulus turning negative, U.S. economic growth may slow down sharply.
This has also led some investors to bet on U.S. bond yields to remain low or continue to move downward in the second half of this year, in stark contrast to the unexpected spike in yields in the first quarter when many analysts raised their forecasts.
The 10-year benchmark U.S. Treasury yield has plunged more than 40 basis points from its March high of 1.776 percent.
JPMorgan Chase sings the opposite: Beware of bond market shorts using non-farm payrolls to launch a new offensive
But there are still bets that U.S. bond yields will eventually move up, JPMorgan Chase had warned last week, beware of the bond market shorts to use the non-farm payrolls to launch a new round of offensives.
JPMorgan’s survey of its U.S. bond clients showed that short positions in U.S. bonds had risen to the highest since 2017 in the week of June 14, and since then (i.e., after the Fed’s June FOMC monetary policy meeting) short positions have declined in size, but are still well above the 52-week average.
Analysis says the logic of the bond market shorts is based in large part on expectations that the economy will continue to rebound and that inflation is more than a temporary threat. Many interest rate market traders believe that it is increasingly likely that the Fed will discuss policy adjustments at the annual meeting of global central banks in Jackson Hole in August, which will embolden bond market shorts if they do start tapering their bond purchases this year.
Dongwu Macro Taochuan team believes that the recent decline in U.S. bond rates has its own special reasons.
First, the decline in the Treasury’s cash balance. Since there is no early agreement on the debt ceiling, the U.S. Treasury must reduce its cash balance in the Federal Reserve’s deposit account (TGA) by $400 billion to achieve its target level at the end of July, which means that a large amount of liquidity will still be released to the financial markets in the short term, which is bound to increase the allocation demand for U.S. bonds by financial institutions, thus pulling down the long-end yields of U.S. bonds.
Another and more important point is that the economic divergence between the US and Europe is likely to intensify. The recent spread of the new crown variant strain of Delta has intensified the divergence of the effectiveness of the U.S. and Europe in fighting the disease, and the recovery of the European economy is bound to be more vulnerable to the impact of Delta than the U.S. in the short term, especially considering that the restart of the European economy is already weaker than that of the U.S. Therefore, against the backdrop of increased economic divergence between the U.S. and Europe, the return of safe-haven funds to the U.S. will also put downward pressure on U.S. bond rates, for example, the net inflow of overseas funds for U.S. bonds has been increasing since mid-June.
The downward trend of the long-end U.S. bond yields is greater than the short-end yields, and the impact on risk assets is feared that the performance of value stocks will be weaker than growth stocks again.
Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors, was quoted by Bloomberg as saying that the recent shift in the U.S. bond yield curve could be interpreted as a sign of a declining growth outlook to some extent, and that “when the growth outlook is bleak, investors will turn to growth stocks again.
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