A GLOBAL bond rally gathered pace on Tuesday (Jun 4), with Treasury yields falling further after a bigger-than-expected slide in US job openings that suggests the world’s biggest economy is cooling.
Treasury 10-year yields declined for a fourth-straight day, reaching 4.32 per cent, the lowest level since mid-May. The catalyst for the move to session lows was April Jolts job openings tumbling to the lowest level in over three years and the March tally being revised lower.
The data prompted traders to price in higher odds of Federal Reserve interest-rate cuts beginning as soon as November. Fed officials have an opportunity to influence expectations via their communications after their next meeting ending Jun 12.
In the meantime, the US employment report for May to be released on Friday and May inflation data will inform their deliberations.
The job openings weakness “doesn’t indicate near-term action is needed, but it helps the case for a September cut,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets. The 10-year note’s yield is likely to test 4.309 per cent, the low end of its range since Apr 2, he said. It tumbled 11 basis points on Monday after the Institute for Supply Management’s manufacturing gauge for May fell unexpectedly.
Still, buyers remain vigilant after a sell-off last week pushed yields to the highest levels in months, spurred by faster-than-expected inflation data that’s testing conviction in the outlook for Fed rate cuts.
GET BT IN YOUR INBOX DAILY
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Central bankers including Fed chair Jerome Powell have repeatedly stressed the need for more evidence that inflation is on a sustained path to the 2 per cent goal before cutting interest rates.
“US Treasuries continue to look attractive as the US economy is slowing more than others in the developed world,” strategists at Pictet Asset Management wrote in a note. Since “inflation is proving sticky,” the firm has a preference for US inflation-protected bonds which look more attractively priced.
Money markets see 43 basis points of easing by year from the Fed, equivalent to one quarter-point cut. That compares to just 30 basis points of cuts as recently as Wednesday, according to swaps. Traders on Tuesday resumed fully pricing in an initial cut in November; previously, December contracts were the earliest ones to fully price in a quarter-point move.
The falling price of oil is also boosting the appeal of bonds. Brent extended losses from the lowest settlement in almost four months after Opec+’s plan to return barrels to the market earlier than expected raised concerns about oversupply.
“Whilst the ISM was the main catalyst for yesterday’s moves, they got fresh momentum thanks to the latest decline in oil prices,” said Deutsche Bank strategist Jim Reid. Oil prices had already been trending lower since early April, as geopolitical risks ebbed and demand showed signs of faltering.
US Treasury gains on Monday spurred advances across other major markets. The German 10-year benchmark yield is down 13 basis points since Friday’s close at 2.53 per cent, just days after touching its highest level this year. While the European Central Bank is all but certain to cut rates by 25 basis points this week, doubt over further moves is rife with inflation yet to be fully tamed.
“I don’t think they really need to be cutting – the data’s not really rolling over,” said Rob Burrows, a portfolio manager at M&G Investments.
“It does seem that they’ve almost boxed themselves into a bit of a corner. The likelihood is that the first cut will be followed up with some hawkish rhetoric.”
Yields on Australian and New Zealand 10-year bonds fell about seven basis points, while Japan’s 10-year notes retreated three basis points to 1.02 per cent.
“Levels had gotten cheap last week,” said Martin Whetton, head of markets strategy at Westpac Banking.
“Lately it has been a challenge to string two consecutive days of gains for fixed-income markets together but we’ve just had them.” BLOOMBERG
