US Treasury Yields Hit Highest Level This Year... Investors Face Difficulties

US Treasury Yields Falling on Pivot Expectations
Rebound and Uptrend Maintained This Year
Triple-Leveraged Bond Investors Face 17% Loss in 2024
Caution Advised for Bond Investments for Now

US Treasury yields have rebounded this year, reaching their highest levels. This is due to widespread expectations that high interest rates will persist longer than the market had anticipated.

Jerome Powell, Chair of the Federal Reserve System
[Photo by Yonhap News]

On the 24th (local time), the yield on the 10-year US Treasury bond closed at 4.180%, up 0.92% from the previous day. The 30-year yield was recorded at 4.110%. Both are the highest yields recorded this year. Last October, long-term US Treasury yields hovered around 5%, but with growing expectations of a Federal Reserve (Fed) pivot, the 10-year yield closed at 3.860% and the 30-year at 4.018% that same year.

However, as expectations for the first rate cut this year have been pushed back beyond March and the total rate cuts within the year are expected to be modest, bond yields have rebounded. Strong US employment figures also support the view that the Fed does not need to rush rate cuts.

According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a Fed rate cut in March, which once exceeded 70%, has recently fallen to 41.6%. The optimistic outlook of six rate cuts this year, predicted by some on Wall Street, has nearly disappeared. Instead, the market is increasingly aligning with the Fed’s December forecast of three rate cuts (each by 0.25 percentage points, totaling 0.75 percentage points within the year) following the Federal Open Market Committee (FOMC) meeting.

As a result, investors who bet on bond prices rising are now disappointed. When bond yields rise, bond prices fall.

Many Korean investors have also invested in exchange-traded funds (ETFs) that track three times the daily return of the US Treasury benchmark index. According to the Korea Securities Depository, from the beginning of this month through the 24th, net purchase settlement amounts for the ‘Direxion Daily 20+ Year Treasury Bull 3X Shares ETF’ (TMF) among overseas securities reached $1,922,433,800. TMF has fallen 17% this year alone. Leveraged products require caution because even if the underlying index recovers after losses, the ‘negative compounding effect’ can cause continued losses.

Experts still consider this year an appropriate time for bond investment but advise patience for the time being. They suggest monitoring at least until the FOMC meeting scheduled for the 30th-31st. If Fed Chair Jerome Powell adopts a dovish (easing-favoring) stance on monetary policy, there is potential for bond yields to fall again.

Michael Franchez, a bond trading partner at global securities firm MCAP LLC, said, “(Currently) the likelihood that the Fed will maintain rates at a high level for a longer period has increased.”