Bond Traders Are Preparing for a 5% Yield, No-Rate-Cut World bloomberg.com (Bloomberg) -- Bond traders are readying for 10-year US Treasury yields surpassing 5% as the scenario of no interest rate cuts by the Federal Reserve this year looks increasingly possible. Schroders Plc is shorting US bonds across some tenors as sticky inflation raises the risk of higher-for-longer rates. Pacific Investment Management Co. expects the Fed to ease policy at a more gradual pace than peers in other developed markets, with a “non-negligible” chance that it doesn’t cut at all this year. Global yields rose on Thursday as markets around the world adjusted to central banks keeping interest rates higher for longer, with the US two-year yield briefly exceeding 5% for the first time since November, and 10-year yields touching 4.58% after topping 4.5% in the previous session for the first time this year. The moves underscore a rapid shift in the global bond landscape where just a few months ago, the dominant view was for six quarter-point cuts starting in March. The chorus of bond bears is getting louder after Treasuries suffered their biggest one-day loss since August 2022 as a key US price index beat forecasts for the third straight month. “I don’t think 5% or higher is out of the question” for 10-year yields, said Kellie Wood, deputy head of fixed income at Schroders in Sydney. The fund is also positioning for “the chance the Fed doesn’t cut at all this year.” The asset manager holds bearish positions on US two-, five- and 10-year bonds. Read More: Traders See Fed Waiting Until After Summer to Cut as Yields Soar While most investors still project one-to-two rate cuts this year, they see a growing need to hedge against a no-change scenario as solid US data push back the expected timetable. Swap traders have quickly priced out the first rate reduction to November from September, while Wall Street strategists including Goldman Sachs Group Inc. have reset their forecasts. “It is an option that is on the table,” Ben Emons, senior portfolio manager at Newedge Wealth in Connecticut, said of no US rate cuts this year. As markets focus on renewed inflation risks, “the 10-year yield is setting up for full retracement to the top at 5.30%” from before the global financial crisis, he added. Abrdn Plc is looking to reduce duration on 10-year Treasuries and beyond as markets price in a “more resilient growth backdrop,” said Ray Sharma-Ong, Southeast Asia head of multi-asset based in Singapore. Duration typically measures the sensitivity of a bond’s price to changes in interest rates. To some, the current inflation trend echoes what transpired in late 2021, when price pressures proved persistent and laid the groundwork for the Fed’s hawkish pivot. Back then, central bankers initially played down a spike in inflation as transitory, only to months later embark on the steepest hiking cycle in decades. “That’s been clear today as well, with investors pushing out the likely timing of rate cuts until later in the year, and pricing in a more hawkish policy stance ahead,” said Jim Reid, Deutsche Bank AG’s global head of economics and thematic research in London. Treasury Rout To be sure, not everyone is expecting the dramatic selloff to continue. UBS Global Wealth Management’s Kelvin Tay said the firm would be reviewing its forecast of three rate cuts this year, but sees scope for Treasuries to rally when the Fed begins easing. “We do think that they’re likely to actually stabilize at the current levels before eventually heading toward the 4% level when the Fed embarks on the first cut for the year,” Tay, regional chief investment officer, told Bloomberg Television. The fund holds a long position in US rates, he added. But a continued bout of strong readings from the US may embolden the view of those who believe in inflation’s stickiness, like Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo. “There still remain upside risks to yields,” said Ishigane, who bought Treasuries this week and is continuing to hold them. “I see a 75% chance that the Fed will start cutting interest rates in September and a 25% likelihood of no cuts at all this year.”
Yields are going higher in the short term but a retest of 5% will be a huge buying opportunity. Yields may not head back to zero, but 5%+ is unsustainable. The equity market has been looking through the current bout of higher rates pretty much since 2021, and IMO has it right.
5% is unsustainable? Why would you think that when 1 trillion is being added to the National Debt every 3 months? You can't have it both ways.
how exactly it's not sustainable with 1 trln added every 100 days and rising inflation and Fed expected to cut into rising inflation an US bullied the whole world of buyers into all kind of sanctions included expected direct confiscation of russian assets What market really thinks is that US Fed will be forced into QE to put lid on rates. I seriously doubt they would be able to buy 300 bln every month with impunity for long We're facing really really serious inflation
JP Morgan is considering all scenarios between 2% and 8%, which (ballparking) would push 30-year mortgages to around 11-12%.
The first para is what I mean by not sustainable. We can't afford >5%. That said, the U.S. government is effectively controlled by oligarchs. Economic chaos is the last thing they want, so if push comes to shove I they'll cut federal spending (or raise taxes) and toss all the diversity consultants, EV mandates and Medicare recipients to the curb. The real wild card is Trump as he's, at this stage, locked in a death struggle with the uniparty. They tried to take him out and seem to have missed. Fiscal consolidation won't be part of his agenda.
Wildcard indeed. First, he's a uni-party all by himself lol. Second, he luuuuuuves debt. And third, his ego and certainly not his intellect decides all. Fourth, we, meaning the USA, will only change our ways once we have no other choice. And I don't see that happening for at least another generation or two. Of course I could be dead wrong - and if so hopefully I will be dead .. and buried by then.