Market expectations of first Fed rate hike continue to be pushed back
galloping bond According to Wall Street strategists, yields will fall further as markets realize that the recent bout of inflation is fleeting.
The 10-year Treasury note yield fell 12 basis points to 1.18% on Monday, the lowest since February 11. With the fall, the benchmark yield has fallen 59 basis points since the top out on March 31.
“The yield on a 10-year note has fallen below the 200-day moving average like a hot knife through butter over the past 24 hours,” wrote David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research. “Up to 1.0% on the charts is nothing but dead air.”
What began as a steady decline in yields has intensified in recent weeks as the bond market has come to terms with the idea that the Federal Reserve will not need to be as aggressive as previously thought.
According to Rosenberg, market expectations of the first Fed rate hike continue to be pushed back, and four rate hikes, or 100 basis points of tightening, have been removed from Treasury pricing since April.
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This 5 years, 5 years ahead, the Federal Reserve’s preferred gauge for inflation expectations, has fallen from a recent high of 2.5% to 2%, a sign that prices for some goods and services are rising. The recent surge is temporary, as suggested by the central bank.
The Consumer Price Index rose 5.4% annually in June, the highest since August 2008. The price jumped 0.9% on a monthly basis, also the fastest in nearly 13 years.
A 10.5 per cent increase in the prices of used cars and trucks has led to a steep fall in prices. Already, those prices have begun to decline at the wholesale level, which should be reflected in consumer prices over the next few weeks.
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Fed Chairman Jerome Powell called the issue a “perfect storm of very strong demand and limited supply” and said price gains were temporary but he was unsure when they might reverse.
The used car market has seen a surge in demand as supply chain disruptions due to COVID-19 have curtailed chip production, causing automakers to slow production.
In the short term, supply chain disruptions are not the only problem that markets have to deal with. Traders should also be bullish on COVID-19 cases due to Delta Edition and the ongoing fiscal drama on Capitol Hill
According to Alex Pele, US economist at Mizuho Securities USA, all this should lead to a risk-free environment that lowers bond yields.
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Still, he cautioned that eventually yields are getting higher.
“Additional fiscal policy should lead to a more cautious Fed as well as higher relative US growth and inflation over the medium term,” Pele said. “The net result should be a re-stamping of the Treasury curve.”