It's worth reviewing how far we've come in the past 10 days in the bond market.
Ten-year Treasury yields were at 4.25% on July 26 before a one-way move drove them as low as 3.66% yesterday. The final leg came after a jump in the unemployment rate in the non-farm payrolls report followed by a 12% rout in the Japanese Nikkei in Monday's trade.
After the 10% bounce in Japanese and the comments from the BOJ today, yields have retraced just shy of half the move.
When you zoom out, Fed funds are still at 5.25-5.50% and it's not clear that the economy is in a recession (though it's probably headed that way). Some element of the flight to safety was an unwind of leveraged positions and fears of a meltdown in risk assets, so it will come out.
At the same time, the price action clearly highlights that it's a two-way market and that inflation fears are no longer a factor.
Supply may come back into focus as we get a 10-year auction later today.
Here is how BMO sees the latest Treasury price action:
There has been a clear shift in sentiment in the Treasury market that was underway even before last week’s payrolls disappointment and the subsequent series of calls for an emergency rate cut. As the FOMC readies the market for the upcoming series of rate reductions, it has implicitly confirmed the answer to several of this cycles’ persistent questions. First, is there symmetry at terminal? Apparently not any longer. Second, will the Fed bring policy rates to 6.0%? Nope. Third, how long is an ‘extended’ amount of time at terminal? 421 days (i.e. July 26, 2023 to September 18, 2024). Fourth, how low will the yearly print of core-PCE need to fall before the Fed signals cuts are coming? 2.6% – a bit higher than the 2.0% target than one might have otherwise assumed. Armed with the clarity provided by Powell’s guidance, it follows intuitively that the market would be eager to push forward with pricing in the next logical risk – i.e. that 421 days at terminal was too long and greater economic damage has been inflicted on the real economy than H1’s growth figures suggest.
That said, they are skeptical that 50 basis points is coming in September and the market is pricing in a 64% chance of that unfolding.
