FOMC skip doesn't mean rates are done with rising

FOMC skip doesn't mean rates are done with rising

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  US rates are in an uptrend: the US Treasury is selling large amounts of debt; CPI data might confirm stubborn inflation, and the Bank of Japan might pave the way for fewer Japanese investments abroad. Yet, leveraged investors’ net-short two-year Treasury positions might take yields in the opposite direction if a short squeeze ensues amid a dovish surprise. We believe that the latter is unlikely and that as yields increase, a window of opportunity will open for investors wanting to lock in enticing yields in risk-free Treasuries.


The US Treasury issuance spree begins this week

As discussed last week, the US Treasury must raise a net $116 billion weekly to replenish the Treasury General Account (TGA). That adds to the ongoing refinancing of existing maturities. Since the 2008 Global Financial Crisis until today, the US Treasury has raised that much cash for the TGA only eighteen times—ten of those during the Covid pandemic. On top of that, market conditions profoundly changed: interest rates are the highest they have ever been in the last fifteen years. Hence, such an issuance spree might further drain market liquidity, causing volatility. Today and tomorrow, the US treasury will issue $296 billion between coupons and bills, and we will look at any signs of cracks in liquidity.

Tomorrow’s CPI readings, Wednesday's Fed’s updated economic forecasts, and the dot plot might confirm or remove July’s rate hikes bets.

So far, the market is pricing a 30% chance of a Fed rate hike on Wednesday and an 80% probability of a rate hike next month. Tomorrow’s CPI data might be pivotal for markets to confirm a July rate hike ahead of Wednesday’s FOMC meeting. The case for markets to erase a July rate hike is remote, as recent data show that the labor market is still strong. However, because the central bank remains data-driven, the Fed's updated forecasts and the dot plot on Wednesday might provoke a U-turn in expectation or solidify further a rate hike in July.

Hedge funds are short US Treasuries ahead of the FOMC meeting.

According to a Bloomberg report, leveraged investors added to net-short two-year Treasury positions for an eleventh straight week. That’s the longest run-on record according to data going back to 2006. It’s important to note that leverage funds usually use bond futures in relative value trades, and net short positions fail to tell us what the other leg of the transaction is. However, net-short two-year Treasury positions still need to bottom, while 10-year positions did. Therefore, the overall expectations are for the Federal Reserve to remain hawkish for longer. This information is essential ahead of the FOMC meeting on Wednesday because if the FED decides to sound less hawkish than expected or even slightly dovish, US Treasuries might gain. If certain yield levels are hit as Treasuries soar, investors might be forced to cover their short positions, provoking a short squeeze. Although there is a higher chance of an aggressive Fed this week, the above is a tail risk that cannot be excluded.

Bank of Japan.

Friday’s BOJ policy meeting will also be critical. Although the expectations are for Ueda not to change policies surrounding the yield curve control, the risk of a hawkish surprise remains, and it could severely affect rates in the US and Europe. Since the beginning of 2022, Japanese investors have decreased their holding of US Treasury debt. They own 15% of the $7.6 trillion in US Treasury securities held by foreign countries. Any hint at a change in curve control policies might see the selling of government bonds outside Japan, putting even more pressure on US Treasury yields.

US Treasury yields look in an uptrend.

Two-year yields might break resistance at 4.63% this week to find strong resistance at 4.80% next. 

Source: Saxo Platform.
Source: Saxo Platform.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992