Investor Appeal Heightens As Bond Market Swings Open Door For 4% Yield

Bond traders are preparing for a potentially volatile week as the release of important employment data looms.

The employment data could drive the yields on 10-year treasuries closer to the 4% mark.

Market experts believe reaching this level could entice investors toward government debt, reports Bloomberg News. Last week, the benchmark rate approached a significant level, reaching 3.89%. This surge followed an upward revision to the first-quarter economic growth of the U.S. and a decline in initial jobless claims, contributing to the most impactful day for Treasuries in over three months.
Events in the next week can trigger new selling rounds and propel yields toward the 4% mark. Among these events are the release of significant economic reports for June, particularly crucial labor-market data, and the publication of minutes from the Federal Reserve's recent meeting. 

However, bond investors now wonder if yields around 4% provide adequate compensation for the risk associated with the central bank's ability to manage inflation effectively, noted the outlet.

According to the research firm CreditSights Inc., there is a 50-50 probability of an additional rate increase by the Federal Reserve during the upcoming policy meeting scheduled to conclude on July 26. 

Also Read: Fed Pause Aside, Global Bond Sell-Off Ahead Of Powell Testimony Put Pressure On Treasuries: Are Rate Hikes Done Finally?

The research firm predicts quarter-point cuts at each meeting throughout 2024. Even if this projection does not materialize and the Federal Reserve takes a more aggressive stance, the firm anticipates that it would restrict any significant selling pressure on longer-dated Treasuries. 

On June 14, the Federal Reserve kept its policy rate steady at 5%-5.25%, a decision that aligned with most analysts' predictions. The revised quarterly forecasts for both the economy and monetary policy, disclosed on the same day, indicated that officials anticipate two more rate hikes before the year's end.

"Central banks are clearly fearful that policy isn't sufficiently restrictive to curb inflation," Bloomberg quoted Dominic Konstam, head of the macro strategy at Mizuho Securities, saying.

"The tightening cycle will catch up with the economy," Bloomberg quoted Laird Landmann, co-director of fixed income at TCW Group Inc., saying. "A couple more rises in the funds rate means we get to a point of more accidents, and that will bring a slowdown in the U.S. economy or a hard landing."

The Breakeven inflation rates for Treasury Inflation-Protected Securities have almost reached the sub-2% levels predominant until 2021. Presently, the five- and 10-year breakeven rates stand at approximately 2.2%, contrasting with the 4% year-on-year rate for the consumer price index observed in May, Bloomberg noted. 

Here are the key things to watch on the Economic data calendar next week:

• July 3: S&P Global US manufacturing PMI; ISM manufacturing; construction spending
• July 5: Factory orders
• July 6: MBA mortgage applications; Challenger job cuts; ADP employment; trade balance; weekly jobless claims; S&P Global US services PMI; Jolts job openings; ISM services index
• July 7: US employment report for June
• Federal Reserve calendar:
• July 5: FOMC meeting minutes from June 13-14; New York Fed President John Williams
• July 6: Dallas Fed President Lorie Logan
• Treasury auction calendar:
• July 3: 13- and 26-week bills; 42-day cash management bills
• July 5: 17-week bills
• July 6: Four- and eight-week bills
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