Once again, the markets are acting against common sense. One would think that, with the highly optimistic GDP data recently released, investors would be alarmed by the threat of another interest rate hike, but this is not the case.
The lack of concern is not because people are confident that the Fed has managed to tame inflation (it is still too early to say) but because there are doubts about the figures released: How? Why? At whose expense?
It is puzzling how the U.S. economy has grown 4.9% from 2.4%, while small-cap companies continue to struggle. Also, why haven't consumer stocks benefited much from the sharp rise in consumer spending? Where has the money gone?
All of that raises suspicions that things are not so rosy in reality and that someone cleverly manipulated the deflator values down a couple of points to improve the statistics. Let's see if they revise the figures in the second reading.
There is one more thing to consider: GDP does not consider income distribution within a country. Therefore, even if money flows around the country, it does not mean that everyone uses it equally. This situation leaves many unanswered questions.
As a result, fears of a possible interest rate hike did not last long, and the yield on ten-year US Treasury bonds did not stay above the 5% threshold for long. At this writing U.S. Treasury yields declined as traders turned their eyes to the two-day Federal Reserve meeting scheduled for October 31 - November 1, as the economic data calendar suggests.
However, the information campaign may have also played a role in raising sentiment.
First, news that hedge fund manager Bill Ackman, often referred to in the media as one of the top fixed-income bearish guys, closed his bets against Treasuries helped the bond rally. Afterwards, analysts summed up the move.
Most recently, an article appeared in Barron's entitled "Stop Crying About Bonds and Buy Them Instead," suggesting that the bond market could regain its safe haven status due to continued geopolitical turmoil or signs of recession.
Undoubtedly, this will happen eventually, but no one knows precisely when. Therefore, it is not wise to mindlessly follow everything you read on the Internet or listen to the opinions of hedge fund managers. It is essential to think for yourself.
What factors could push U.S. Treasury bond prices lower?
Starting with the obvious: if the war in Israel starts and spreads throughout the Middle East, causing a new wave of inflation, it could trigger a backlash from Powell and company. At this point, however, the markets consider such a scenario unlikely.
What is less obvious, and what is usually forgotten: Treasury yields are not only determined by monetary policy; the amount of debt securities sold on the market by the Treasury Department also plays an important role.
For example, if members vote to increase the pace of bill, note and bond sales in the fourth quarter above expectations to finance the growing budget deficit, yields could rise. Given the soaring costs of servicing the national debt, it could seem like only a matter of time.
Analysts had even expected an increase in short-term securities issuance on Wednesday, on the occasion of the publication of the Treasury's "quarterly redemption" statement. However, there has been an unforeseen development.
This Monday, the Treasury lowered the debt forecast to $776 billion in the fourth quarter, $76 billion less than forecast in July, partly thanks to the addition of tax revenues from states that received natural disaster deferrals.
What's next?
Despite the downward revision, the new forecast still means record borrowing volume in the fourth quarter. Also, the Treasury can still deliver some surprises, and yields could rise. In short, there are many factors to consider before lining pockets with instruments like the TMF.