Cailianshe (Shanghai, editor Xiaoxiang) reported that with only more than the last week left before the Fed's September interest rate resolution, the Fed will officially enter the silent period before the interest rate meeting starting this week - there will be no longer any Federal Reserve officials who will make monetary policy speeches in public. This also means that the performance of the US Treasury market this week is expected to be driven more by economic data and market expectations for the Fed's September interest rate decision.
Previously, U.S. Treasury yields rebounded sharply last Friday, as the strong performance of last month's PPI data released by the U.S. Department of Labor on the same day further increased the possibility that the U.S. CPI data will remain at a high level in the "5-era" on Tuesday. Data shows that the U.S. Producer Price Index (PPI), which reflected final demand last month, rose 0.7% month-on-month, higher than expected growth of 0.6%. In the 12 months to August, PPI rose 8.3% year-on-year, the largest year-on-year increase since November 2010.
indicator 10-year U.S. Treasury yield rose sharply by 4.5 basis points at 1.347% at the end of last Friday, ending the decline recorded in the previous two trading days due to strong demand for U.S. Treasury bidding. From a weekly perspective, the 10-year U.S. Treasury yield rose by 3 basis points last week, rising for the third consecutive week, which is the longest round of weekly consecutive gains since the seven-week continuous gains ended in mid-March.
However, technically speaking, since mid-July, the 10-year U.S. Treasury yield has been fluctuating narrowly between the high of 1.423% and the low of 1.127%. As the possibility of the Federal Reserve's September resolution immediately announced Taper, many industry insiders expect that this consolidation trend will likely continue until at least October.
Before entering a period of silence, speeches by several Fed officials last week showed that the Delta strain did not shake their ideas: they supported the message conveyed by Chairman Powell at the annual meeting of the global central bank on August 27 - the Fed may start reducing the code later this year, although the growth rate of non-farm employment slowed last month due to the impact of the epidemic.
"I don't think the August jobs report has changed my point of view," Cleveland Fed Chairman Mester told reporters last Friday. "I feel relieved that this year will start and gradually shrink in the first half of next year." New York Fed Chairman Williams and Fed Director Bowman also said last week that it may be appropriate to reduce bond purchases this year.
The Federal Open Market Committee (FOMC) will meet on September 21-22. The Wall Street Journal, which often serves as the mouthpiece of the Federal Reserve, wrote an article last weekend that Fed officials may seek agreement at the upcoming September interest rate meeting to prepare for the start of reducing loose monetary policy in November. While these officials are unlikely to make the decision at a meeting held on September 21-22, Fed Chairman Powell could use the meeting to signal that they may initiate the reduction process at the next meeting, on November 2-3.
This week focuses on US CPI data
Looking forward to this week, the US August CPI data to be released on Tuesday is undoubtedly the biggest highlight of the US bond market. 8 non-farm data showed higher-than-expected wage growth for U.S. employees, which brought more attention to a pressing question: whether inflationary pressure will be temporary as Fed officials predict.
In July this year, the increase in US prices slowed slightly, but the year-on-year increase remained at a 13-year high. The median expected value of the latest media survey shows that US CPI data in August may still rank high in the "5 era" - the year-on-year growth rate of CPI in August is expected to reach 5.3%, up 0.4% month-on-month. The year-on-year increase of core CPI is expected to remain at 4.3%, the same as last month.
Many industry insiders said that although Fed Chairman Powell assured the market that policymakers will adopt a gradual approach to reduce monthly bond purchases, concerns about continued rising inflation may speed up the process of removing loose monetary policy. If inflation data on Tuesday backed the Fed's claim that inflation was temporary, the possibility of long-term yields remain low in the next six to 12 months would be higher.
But others are more cautious. Macquarie Group strategist Thierry Wizman believes factors such as rental costs may push up CPI, increasing concerns that inflation will continue to rise.Wizman pointed out that this situation will lead traders to bet that the Fed will tighten its policies ahead of schedule, which often pushes up short-term bond yields. Therefore, he suggested betting on the interest rate spread between long-term bond yields and short-term bond yields narrowed and the yield curve flattened.
Currently, the gap between the highly-watched two-year and 10-year U.S. Treasury yield curve is 112.2 basis points, down from more than 140 basis points in early June. The initial narrowing of the yield curve is due to traders’ belief that the Fed will reduce its bond purchases as early as this year and pave the way for the future of interest rate hikes. But recently, as the number of new crown cases in the United States surged, expectations of the economy's recovery from the epidemic have weakened, and have also pushed up the narrowing of the yield curve, which is often seen as a key economic expectations indicator.
Adam Kurpiel, head of interest rate strategy at Societe Generale, said investors are ready to deal with the short-term situation. He remains bearish on U.S. Treasury bonds as expected normalization of Fed policy is imminent. “High inflation will only confirm this trend,” he said. "We have made substantial progress in inflation. We need to focus on future employment."
Some other well-known Wall Street investment banks are still relatively optimistic about US Treasury yields rising before the end of the year. Goldman Sachs expects U.S. Treasury yields will rise for the rest of the year, but the dollar will weaken against most currencies. The correlation between the US dollar and U.S. Treasury yields tends to change over time and depend on the macroeconomic fundamentals that drive interest rates and the forex market.
