Bond selling continues as yields gradually rise in European morning trading. This was not supposed to be part of the scenario for 2024, looking at what traders were positioning in November and December of last year. Yet here we are, with Treasury yields reversing much of that trend.
Daily chart of 10-year US Treasury yields (%)
For some context, we have seen a significant pullback in terms of Fed rate cuts in recent months. And this is what the evolution of the bond market here confirms.
The first rate cut was initially scheduled for March, then postponed to June. Now it’s being pushed back to September and even that isn’t necessarily a given when you take into account the inflation outlook.
Looking at specific market price action, we saw traders anticipating rate cuts worth 156 basis points for this year at the end of December last year. Currently, traders are only pricing in a meager 42 basis point rate cut.
So where do we go from here?
A lot of it comes down to the inflation situation. If inflation remains stubborn, there is still room for a further decline in prices. This means a higher dollar and yields that will also remain supported until the narrative changes.
This week, a further rise in Treasury yields will keep the focus on USD/JPY. The pair is now trading 0.2% higher at 154.55, with a close watch on the 155.00 mark. This could be a potential trigger point for intervention for Japan.
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