Bonds Hit as Strong Data Keeps Fed Wagers in Check

The largest bond market globally experienced a continuation of the selloff witnessed this month, driven by robust economic indicators and hawkish statements from Federal Reserve officials, fueling expectations of prolonged higher interest rates.

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Across the US yield curve, Treasury prices declined, with two-year yields once again nearing the 5% threshold. Federal Reserve Bank of New York President John Williams, when questioned about the possibility of rate hikes, remarked that it is "not" his primary expectation but acknowledged the possibility if warranted. Despite this, equity traders remained unfazed, with the S&P 500 rebounding from nearly "oversold" levels.

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Chris Larkin of E*Trade at Morgan Stanley commented, "Most of the data this week shows the economy is still firing on all cylinders," suggesting a potential challenge for the Fed's plans to cut rates.

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The yield on 10-year Treasuries rose by five basis points to 4.64%, while the S&P 500 hovered around 5,040. Micron Technology Inc. stands to receive $6.1 billion in grants from the Commerce Department, while Taiwan Semiconductor Manufacturing Co. revised its outlook for chip market expansion. Netflix Inc. is set to announce its results after market close.

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Although jobless claims remained low, indicating a healthy job market, the Philadelphia Fed factory index exceeded estimates. Despite a decline in existing-home sales, the pace remained roughly in line with economists' forecasts.

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Market expectations for Fed rate cuts, which plummeted over the past two weeks, decreased further this week following Chair Jerome Powell's indication that policymakers will delay easing policy longer than previously anticipated. Despite an initial quarter-point reduction still being priced in for November, International Monetary Fund Managing Director Kristalina Georgieva suggested the potential for Fed rate cuts in 2024.

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The primary concern in the market currently revolves around inflation, which is resurging and casting doubt on the possibility of rate cuts in 2024. Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, expressed skepticism about rate cuts in 2024, advocating for preparation for a scenario of sustained higher inflation and interest rates.

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Mark Haefele of UBS Global Wealth Management forecasted the yield on the 10-year US Treasury to conclude the year around 3.85%, anticipating continued rate cuts by the Fed once initiated, with the bond market likely pricing in further cuts into 2025 and beyond.

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Bank of America Corp. strategists led by Mark Cabana suggested that while timing the market is challenging, investors can confidently increase duration exposure, recommending a "long" position in five-year Treasuries, supported by expectations of the Fed refraining from hiking rates, coupled with risk asset sensitivity to rates and cleaner duration positioning.

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