US 10-Year Yield Is Set to Revisit 4.5%, ING Financial Says

Economic

Summary:

Derivatives trading showing move to prepare for higher yields.

In the world’s biggest bond market, there’s a growing sense that the benchmark 10-year yield is set to revisit the 4.5% level last seen in November before a massive year-end rally kicked in.

A key US job-market report Friday is the next hurdle for investors, who have been ratcheting back expectations for the degree of Federal Reserve policy easing they see this year, given the economy’s resilience and sticky inflation. They’re also starting to anticipate fewer rate cuts in the coming cycle, which is guiding 10-year Treasury yields up as well, according to ING Financial Markets.

Overall, the “no landing” view on the economy is beginning to take hold in the bond market, says Michael Darda at Roth MKM.

Source: Bloomberg

The 10-year Treasury yield has risen about 14 basis points this week to around 4.34%, after reaching 4.43% Wednesday, the highest since November. In the options market, traders were targeting a move to almost 4.5% by the end of this week, with trades in derivatives Wednesday generally skewed toward hedging against higher yields.

It’s “tough to stand in the way of the 10-year heading to 4.5%,” Padhraic Garvey, head of global debt and rates strategy at ING Financial Markets, said in a note dated April 3.

For investors, the 4.5% level is significant psychologically, with some seeing it as an area where they’d step in to put money to work. The yield is up more than 40 basis points from the end of 2023.

Data Wednesday showed US companies boosted hiring last month by the most since July and some wage gains accelerated. Government figures to be released Friday are projected to show an increase of about 213,000 nonfarm jobs last month, following a 275,000 gain in February.

CPI Ahead

Potentially even more crucial for the path of yields, next week brings data on March core consumer prices, which are forecast to have risen at a 3.7% annual pace, compared with February’s 3.8% level.

Forecasts for the US CPI, “if confirmed, would suggest that the US is not a 3% inflation economy but is in fact closer to being a 4% one,” Garvey and his colleagues wrote.

Fed officials in March lifted their outlook for the long-run policy rate to 2.6% from the 2.5%, according to the median projection. They also maintained their outlook for three rate cuts this year. Swaps traders currently put roughly even odds on an initial Fed cut in June, and pricing suggests they see a chance of fewer than three reductions this year.

Treasury yields dipped in early trading Thursday, suggesting some investors were taking the latest increase in yields as an opportunity to buy.

Michael Gladchun at $335 billion asset manager Loomis, Sayles & Co. is in that camp. He and his colleagues expect three to five Fed rate cuts this year, helping push the 10-year yield down to the 3.8% to 3.9% range in about six months.

As yields “have backed up again up towards the high levels, we have been buyers of the dip,” said Gladchun, a co-portfolio manager for the firm’s active US Treasury strategies and also co-leader of the US yield curve sector team.

Source: Bloomberg

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US 10-Year Yield Is Set to Revisit 4.5%, ING Financial Says

Source: Bloomberg

CPI Ahead

Source: Bloomberg

Risk Disclosure