The president of the United States Federal Reserve again introduced concern about a rebound in inflation in his speech. And the easing of the more moderate monetary policy planned for next year translates into selling pressure on fixed income. US debt registers a rebound in yields that leads to Ten-year securities again above 4.5% after the last 25 basis point cut of the year and with the warning that inflation may hit the US economy again. In fact, market expectations now do not consider that yields could fall by an average of 4% until 2026.
Jerome Powell, president of the Fed, poured cold water on the market by eliminating two rate cuts from the equation in 2025. That is, the reference interest rates in the United States would remain at 4% at the end of 2025. what from now to then there would only be 50 basic points of cut. And all this due to the possibility of a new rise in prices.
“As the gap between the current federal funds rate and views on its neutral level has narrowed, FOMC members see reason to move more gradually as they seek to carefully calibrate monetary policy so that it does not generate a burden or a significant stimulus for the US economy“explains abrdn’s chief economist, James McCann.
The Federal Reserve thus changes its approach and advances its longer-term monetary policy plans. And this has its effect on the evolution of the US debt curve and how US sovereign bonds are priced in the secondary market. After the Fed meeting, all securities with a duration of twelve months or more recorded an increase in profitability. The ten-year bond once again exceeds 4.55%, almost 14 basis points from what it registered this Monday. And 30-year bonds reach 4.7%.
In the shorter tranches, below twelve months, there are hardly any changes after the Fed meeting, with the six-month debt still at 4.3%. In this way, the debt curve is abruptly corrected and abandons its inverted condition characteristic of recent years. Thus, six-month bonds cut their profitability by 100 basis points so far in 2024, as is the case with one- and three-month bonds. For US one-year securities the cut is 70 basis points to the current 4.3%. In contrast, 10- and 30-year bonds rise by more than 60 basis points compared to the return at the beginning of January.
The Federal Reserve warns of the possibility of a reinflation and analysis firms are recalibrating their expectations for the coming months. Now, the market consensus collected by Bloomberg considers that the CPI in the United States will fall to 2.4% in the second quarter of 2025. But, on average for the year, it will be 2.5%. That is, any US bond, regardless of maturity, would be yielding a profitability that beats the expected inflation in 2025 by 180 points.
Likewise, market expectations expect that ten-year bonds will not lose 4% profitability until the first half of 2026 and will be at 4.1% on average next year. That is, with the increase in the price of these bonds (fall in expected profitability) an investor in US debt could earn 4%. With three-month debt, profits would be lower (less changes are expected in the shorter maturities of the curve as fewer cuts are discounted next year) up to 1.9% due to the expected rise in the bond price. And the debt with that maturity will average next year at 3.68%, according to the expectation of all the analysis firms.
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