2024-01-22 19:48:46
The two largest US banks, Morgan Stanley and J.P. Morgan, recommend that investors buy five-year US bonds after they jumped by about 22 basis points last week – the sharpest jump recorded since last May. The US 5-year yield fell slightly today (Monday) since the sharp jump it registered last week (4.06%) and stands at 4.01%.
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The surge in American bond yields occurred against the background of the realization that investors were too optimistic about the Fed’s expected interest rate cut plan. Dovish statements by Fed members, along with positive retail sales data, led to a significant decrease in expectations for the interest rate cut in March, and now the market estimates that there is a probability of 40 % to occur.
Currently, the market expects a total of five interest rate cuts at a rate of 0.25% in each decision during this year, this is in contrast to January 12, when the market expected the Fed to lower interest rates between six and seven times. It was also noted that the US government is expected to sell two-, five- and seven-year bonds this Tuesday, which may put upward pressure on yields in light of the increased supply of bonds.
“This is the ‘dip’ we’ve been waiting for to buy,” analyst Matthew Hornbach, head of global macro strategy at Morgan Stanley, wrote to investors. “With reduced fiscal support and much colder weather there are potential risks of negative results in US economic activity data, especially in the month of February, which signals that there is a buying opportunity.”
According to a Bloomberg report, Morgan Stanley believes that there is a possibility of a decrease in US government bond yields unless the economic data that will be released in the coming weeks surprises the market negatively. JPMorgan is now recommending that investors buy five-year bonds as yields have already climbed to levels last seen in December.
Volatility in the US debt market is expected to continue
The volatility in the American debt market is expected to continue in the coming week as well, against the background of two important economic data that will be published. First, this Thursday the first estimate of GDP data for the last quarter of 2023 in the US will be published, and according to estimates it is expected to signal the strongest growth seen since 2021. On Friday, the Fed’s preferred inflation index (PCE) will be published, with the expected The early predicts that the index will stand at 3%, the lowest level since April 2021.
Bloomberg emphasizes that these data may support the position that the Fed is achieving its stated goal of a gentle economic slowdown. In such a case, the policymakers will be able to implement interest rate cuts this year. However, the uncertainty about when and how quickly the monetary easing cycle will begin has led to fluctuations in the bond markets. JP Morgan predicts that the first interest rate cut by the Fed will likely occur in June, as opposed to the expected timing in May. At Morgan Stanley, however, It is expected that the central banks in the USA and Europe may lower interest rates as early as March.
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