Expectations regarding the pace of rate cuts are cooling by the minute. Proof of this are the sales that have been taking place for weeks in the sovereign debt of Western economies. This is being seen especially in the United States, pending on the one hand the elections and, on the other, the two meetings of the Federal Reserve that remain before the end of the course, the first of them next week after the House elections. White.
Thus, the 10-year United States bond has returned to trading above 4.3% profitability demanded in the secondary market, something that has not happened since July. Sales have been prevailing for weeks, when it reached the lowest profitability (price highest) of the year at 3.61%. Since then, the investor has lost 5.5%.
What is the reason for this strong flight by investors? Mainly due to a cooling of expectations of the pace of interest rate cuts that the Fed will carry out in the coming months. There are two meetings left before the end of the year. For next week the market does have a cut of 25 points. However, they are divided over the possibility, or not, of seeing a second reduction at the December meeting. It must be remembered that a little over a month ago, up to 75 points less were discounted from the reference interest rate before the end of the year.
“The US bond market faces a critical two-week period that will likely set its course for the rest of the year. Key developments begin with the Treasury’s announcement of upcoming debt sales and monthly payrolls data, which will indicate whether the economy is slowing down enough to justify new Fed cuts,” they explain from eToro.
Precisely the complete employment report for October will be published this Friday, but it is expected to be weak since the number of new jobs available fell to its lowest in more than three years in the month of September and the number of layoffs increased, which is consistent with a deterioration in the labor market. On the other hand, the consumer confidence figure increased in October to its highest level since the beginning of the year. “Bond prices have been hit by heavy selling as economic resilience casts doubt on further rate cuts,” they add on eToro.
“Current levels offer investors an opportunity to gradually make reinvestments and reduce risk but we do not recommend increasing durations aggressively at this time,” they point out at Julius Baer. “The US economy appears very resilient and the latest data greatly increases the likelihood of seeing a soft landing”, they add. “In this context, even with rate cuts, yields in the long part of the curve do not have to fall and could even increase,” they conclude.
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