Analysis-Uncertainty over rate cuts wobbles US government bond market

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Strong economic data and concerns over sticky inflation are causing investors to reassess the depth of rate cuts by the Federal Reserve, leading to weakness in the US government bond market. Yields on the benchmark 10-year Treasury reached 4.429% on Wednesday, the highest level in over four months. Futures markets indicate that investors are now expecting the Fed to lower rates by 70 basis points this year, compared to the 150 basis points priced in at the beginning of 2024. The Fed itself projected three 25 basis point reductions this year, but investors have become slightly less optimistic. The selloff in bonds is driven by stronger-than-expected US economic data, which suggests that the Fed may not be able to cut rates without risking inflation. PIMCO expects inflation to remain above the Fed's 2% target and anticipates a more gradual path of rate cuts. Concerns over the state of US finances and a potential rise in term premiums also contribute to the rise in bond yields. The Congressional Budget Office forecasts US public debt to climb to 166% of GDP in 2054. The recent spike in oil prices and worries of a widening conflict in the Middle East could further contribute to an inflationary rebound. Yields on the 10-year have risen by 50 basis points since the beginning of the year, prompting some investors to lock in yields. However, the trade is becoming a test of patience, and investors are closely watching employment and consumer price data to assess the sustainability of the selling pressure in bonds. Year-to-date total returns are at minus 2.1%. Net bearish positions in key two- and 10-year Treasuries futures have increased for the first time in three weeks. Some experts believe there is still an opportunity to add more duration if yields rise further, but confidence in the trade is waning. The selloff in the bond market is not expected to go much further, as higher yields attract income-seeking investors. The lead portfolio manager of the Hartford Strategic Income Fund expects 10-year yields to trade between 4% to 4.75% and for inflation to remain under control.

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https://finance.yahoo.com/news/analysis-uncertainty-over-rate-cuts-050255274.html