After last week’s sharp decline, U.S. bonds have stabilized, bond market indicators and derivative positions indicate that the near future will remain calm, but economic improvement may lead to another decline in bond prices.
Indicator U.S. bond yields hit a one-year high of 1.614% last Thursday, which investors called “unwind has been panic. The market expects the economic rebound will force the Federal Reserve to tighten the monetary environment earlier than expected, thus selling bonds. Yields have since retreated.
Although yields may spike again, but analysts and investors pointed out that the loss of balance Inflation, interest rate swap spreads and U.S. bond listed exchange traded funds (ETF) put options (selling rights), all show that the bond market will return to calm for the Time being.
“The sell-off is probably over,” said Jabaz Mathai, head of U.S. interest rate strategy at Citi, referring to the loss-earnings balance inflation rate is falling back.
Mathai said the decline in break-even inflation and the tightening of interest rate swap spreads are the strongest signals yet that U.S. bond yields have peaked.
“I wouldn’t say at this point that the bear market in U.S. bonds is over, but it could pull back in the near term,” Mathai said. “The 10-year note should stabilize around these levels.”
The U.S. 10-year loss-earnings balance inflation rate fell to 2.16 percent on Monday, starting to fall after hitting 2.24 percent in mid-February. The break-even inflation rate is the implied inflation rate when investors buy inflation-adjusted or conventional bonds to break even.
U.S. bond yields have peaked and are clearly reflected in the narrowing of U.S. interest rate swap spreads. This indicator is a barometer for hedging against rising interest rate activity.
Still, there is evidence that data suggest inflation and other aspects of the economy are rising, supporting the notion that upward pressure on yields may persist. Manufacturing data released Monday showed that U.S. manufacturing activity rose to a three-year high in February and the input price index hit its highest since July 2008.
Signs of pressure remain, suggesting more turbulence, or “panic” as the market calls it, in the months ahead.
But some investors still believe that if the market does not produce panic, rising yields will not necessarily cause problems for the Federal Reserve.
“(The Fed) knows they’re going to be dovish, but at the same time we’re hearing better news,” said Ritchie Tuazon, a fixed-income portfolio manager at Capital Group.
Investors will be closely watching Fed Chairman Jerome Powell’s speech at the Wall Street Journal’s Jobs Summit on Thursday, the last public address by Powell before the Federal Open Market Committee (FOMC) meets on March 16-17.
Harley Bassman, managing partner at Simplify Asset Management, expects yields to rise slowly, with the 10-year bond yield likely to rise to 4 percent in the next three to four years.
“In the short term, I do think yields could be stuck in the 1.5-2% range. The yield has been in that range for the six-month period from mid-2019 through the end of the year.”
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