Benchmark bond yields are once again coming close to reaching the 5% mark, as strong economic data and concerns about an increase in the supply of Treasuries continue to impact the fixed income market.
On Thursday morning, the 10-year Treasury yield rose to within a few basis points of 5%, before stabilizing later in the day.
This initial surge, which nearly reached a 16-year high, occurred as traders digested recent economic data. Despite the Federal Reserve’s ongoing campaign of interest rate increases, this data, such as the unexpectedly strong new home sales report published on Wednesday, indicates that the U.S. economy remains relatively robust.
Upcoming Economic Updates
Several key economic updates are scheduled for release on Thursday, including third-quarter GDP, weekly initial jobless claims, and September’s readings for durable goods orders, trade balance in goods, and wholesale and retail inventories. These updates will be published at 8:30 a.m. Eastern Time. Additionally, pending home sales for September will be released at 10 a.m.
The core PCE index, the Federal Reserve’s preferred inflation gauge, is set to be released on Friday. Ahead of these updates, market analysts predict a 97% probability that the Fed will maintain interest rates at a range of 5.25% to 5.50% during its next meeting on November 1, according to the CME FedWatch tool.
Looking ahead, there is a 29% chance of a 25 basis point rate hike to a range of 5.50% to 5.75% at the subsequent meeting in December. The central bank is not expected to lower its target for the Fed funds rate to around 5% until September 2024, according to 30-day Fed Funds futures.
Concerns about Treasury Supply
Furthermore, worries about the market’s ability to absorb the increased supply of Treasuries have also been weighing on bond prices recently.
In conclusion, as benchmark bond yields hover around the 5% mark, supported by positive economic data and concerns about increased Treasury supply, the fixed income market remains cautious.
The Latest Refunding Announcement and Economic Strength
In the upcoming week, there are concerns about increased auction sizes that have led to certain issues, including a weak 5-year auction. This has further solidified the ongoing sell-off. Jim Reid, a strategist at Deutsche Bank, sheds light on this.
The Treasury is set to auction $38 billion of 7-year notes at 1 p.m. Eastern. This auction holds significant importance in the current market environment.
German Bund Yields
German 10-year bund yields BX:TMBMKDE-10Y remain relatively stable at 2.882%. Market participants are eagerly awaiting the monetary policy decision of the European Central Bank (ECB) on Thursday. It is widely expected that the ECB will maintain its deposit rate at the existing level of 4%.
Economic Exceptionalism: U.S. Strength
Stephen Innes, the managing partner at SPI Asset Management, believes that the United States will showcase its economic strength today. He highlights the resilience of the American consumer and an ongoing growth trend. Despite the Federal Reserve’s efforts to manage inflation by achieving below-trend growth, the preliminary report on Q3 GDP is anticipated to reveal a robust expansion rate of 4.6% for the largest economy in the world.
Implications for the Federal Reserve and Equities
If this economic strength persists, it could potentially prompt the Federal Reserve to delay the first rate cut or even consider implementing another rate hike. While this could have a detrimental effect on equity valuations, it may drive capital flows back into the dollar.
In conclusion, market participants are closely monitoring developments post-refunding announcement and keeping a keen eye on the economic strength of the United States.