Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Fixed Income Strategy
Yesterday's FOMC meeting was key for bond markets because it strengthened the idea of a soft landing. This is good for risky assets but bearish for bonds carrying high duration because:
We, therefore, continue to favor the front part of the yield curve for up to 5 years. The 10-year tenor offers an appealing risk-reward ratio in a buy-and-hold diversified portfolio, although the yield might rise. We are cautious of the ultra-long part of the yield curve as the macro-economic backdrop calls for a steeper curve and high long-term yields.
Despite the long part of the US Treasury yield curve not reacting, it's important to note that market sentiment is changing fast. Since the beginning of the month, TLT, the iShares 20+ year Treasury Bond ETF, has seen the largest outflow since January 2022.
The Fed press conference was notably dovish, with Powell dismissing the upside surprise in inflation for January and February and highlighting that labor market weakening could warrant a policy response. Powell also mentioned that a decision about QT will be made soon, which might imply a greater balance sheet reduction over time. For our take on it, click here.
The bond market reacted with a twist, steepening the yield curve. Two-year yields dropped by -8bps, closing the day at 4.6%, ten-year yields dropped by -2bps to 4.37%, but 30-year yields closed the day 2.5bps higher at 4.45%. We expect the twist steepening to continue in the next few weeks.
14 Feb Higher CPI shows that rates volatility will remain elevated.
12 Feb Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.
06 Feb Technical Update - US 10-year Treasury yields resuming uptrend? US Treasury and Euro Bund futures testing key supports
05 Feb The upcoming 30-year US Treasury auction might rattle markets
30 Jan BOE preview: BoE hold unlikely to last as inflation plummets
29 Jan FOMC preview: the Fed might be on hold, but easing is inevitable.
26 Jan The ECB holds rates: is the bond rally sustainable?
18 Jan The most infamous bond trade: the Austria century bond.
16 Jan European sovereigns: inflation, stagnation and the bumpy road to rate cuts in 2024.
10 Jan US Treasuries: where do we go from here?
09 Jan Quarterly Outlook: bonds on everybody’s lips.