Base Rate Cut → Long-Term Bond Yields Typically Fall
However, Long-Term Bond Yields Rise After the Big Cut
Attention is drawn to the fact that long-term U.S. Treasury yields have actually risen since the U.S. implemented a big cut (a 0.5 percentage point reduction in the benchmark interest rate).
On the 26th (local time), the yield on the 10-year U.S. Treasury note traded at around 3.800%, up 0.25% from the previous day. This is about 15 basis points (1bp = 0.01 percentage points) higher than the level before the announcement of the big cut at the Federal Open Market Committee (FOMC) on the 18th.
Typically, when the benchmark interest rate falls, demand for previously issued bonds with higher interest rates increases, causing bond yields to decline. However, the opposite phenomenon is occurring.
The reasons are complex. First, bond market experts pointed out that Treasury yields had already reflected that level even before the U.S. entered the rate-cutting cycle. Many investors anticipated the rate cut and bought Treasuries in advance.
Jonathan Duensing of Amundi US, head of U.S. bonds, said, "There were some investors who bought on rumors and sold on facts regarding last week's FOMC decision," adding that "(the bond) market had already priced in a very aggressive quantitative easing cycle."
Additionally, the market's assessment that the Fed will now focus more on preventing labor market deterioration rather than inflation in its monetary policy is also cited as a reason for the rise in long-term bond yields.
Robert Tipp, chief investment strategist for PGIM Bonds, said, "The Fed is confident that inflation is under control, while unemployment is rising and the pace of job creation is insufficient," and argued that "the rise in long-term bond yields reflects the market's risk that inflation could be higher but the Fed will not be overly concerned."
Concerns about the unstable U.S. fiscal situation are also contributing to the rise in long-term Treasury yields, CNBC, a U.S. economic media outlet, pointed out. According to the U.S. Treasury Department, the annual interest on the U.S. government's fiscal debt this year has exceeded $1 trillion for the first time in history.
CNBC explained, "Long-term Treasury buyers may be reluctant to invest in a fiscal deficit amounting to 7% of gross domestic product (GDP)," and added, "(All the bond investors we interviewed said the situation is unstable and they are reducing their Treasury allocations.)"
Expectations that the Fed may not implement another large rate cut have also heightened concerns among long-term bond investors. On the same day, the number of new U.S. unemployment claims fell by 4,000 from the previous week to 218,000, the lowest in four months, reducing the likelihood of a big cut in November. According to the FedWatch tool, the probability of a big cut in November in the federal funds futures market fell to 51.3% that day, down from just above 60% the previous day.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
