The opposite of what was expected happens. Here are the reasons that determine an anomaly that penalizes especially the longer maturities.
The theory would be that in the face of rate cuts bond prices would rise. This time it is not happening and the market is wondering why. The Fed decision last Wednesday to reduce the cost of money by a good 50 bps had no effect on either the medium or long maturities with respect to the Usd front.
The same situation also on the ECB context. Let’s look at some numbers.
The US 10-year rises to 3.8%
The most significant example is that of the 10-year Treasury. Its yield had fallen to 3.6% last week and a fall below 3.5% was now expected, a level considered important in view of a strong bullish turn in prices.
Instead, after Powell’s words - post-Fed meeting - it has started a progressive forward march of the yield, which rose to 3.8% in the morning session of Wall Street on Tuesday 24 September. This occurred, however, in a context of volatility, which is inevitable in a framework of uncertainty such as the current one.
Why bond prices are not going up
Investors were ready for anything in the past few weeks except for government bonds and bonds in USD and EUR that did not rise in the presence of aggressive rate cuts. The reasons for this reversal in the way prices move are essentially four:
- the geopolitical framework highlights dramatic tensions in the Middle East. The word war is circulating insistently and the fear that it could cause an increase in the price of oil and an effect on inflation is inevitable;
- from 24 to 26/9 the US Treasury will carry out various auctions and weights for 2, 5, and 7-year maturities. The market is waiting for their results and especially the yields offered;
- within the Fed there is no unanimity on future decisions on rates, although the prevailing positions favor further cuts already during the final part of 2024. Hesitations are nevertheless being felt;
- the next presidential elections will affect the outcome of the Fed’s monetary policies. Institutionalists know this and do not want to be surprised by unexpected changes.
This very complex situation could be destined to last for a short time. It must be taken into account that bond yields sense the evolutions of monetary policy in advance. In the case of US Treasuries, they are based on the trend of Fed futures, which are very sensitive to institutional sentiment. In the current phase, there is an expectation (compared to the current rate of 5%) of a drop to 4.75% in 56% of cases and to 4.5% in 44% for the next meeting of the US Central Bank.
Something will therefore happen by the end of the year and consequently the prices of long Treasuries will rise, but for this to happen we will have to wait a little longer. The markets do not seem to be in a hurry.
Original article published on Money.it Italy 2024-09-25 13:52:43. Original title: I tassi scendono ma i bond non salgono. Cosa sta succedendo
