US Treasury bond yields rose on Monday afternoon as bets for a June rate from the Fed dipped below 50%.
Bloomberg and other analysts said the yield on the two year T-bond climbed to its highest level this year as swaps traders and economists at Goldman Sachs forecast fewer Federal Reserve interest-rate cuts this year and Morgan Stanley strategists warned of the looming impact from rising yields.
The US two-year yield rose 2 basis points from Friday’s closing level and reached 4.749%, the highest level since December 11. It eased to end at 4.7430%.
The yield on the five-year note rose to 4.367%, the highest since November 28 and
The yield on the key 10 year bond touched 4.35%, the highest since early November and ended at just over 4.33%.
The rate moves and changes in forecasts came on the eve of the start of the two day fed meeting, and around 12 hours before the results of the Bank of Japan policy meeting in Tokyo which is expected to see a major change to the ultra loose monetary policy stance by ending the negative interest rate regime.
That is likely to see a rise in bond market volatility until traders can see where rates are headed – the best bet is that they edge up to 0.15%.
Japanese banks are reported to have been training trading room and counter staff about what the move away from negative rates means and how to trade and advise customers in the new regime.
The Bank of Japan went to negative rates in February, 20216, so there’s tens of thousands of staff and others at banks and other financial groups who have not experienced positive rates, as well millions of customers who should see their memories of pre 2016 times, revived.
(The Bank of Japan decision will overshadow the Reserve Bank decision and media briefings here this afternoon).
US share investors though will continue to ignore the bond markets. After all, they have ignored concerns about the rise in bond yields so far this year (as inflation refuses to continue to ease) besotted by the artificial intelligence hype.
But Morgan Stanley warned on Monday that US Treasury yields are nearing a level that could put pressure on stocks again, like they did up to October, 2023.
Strategists led by Michael Wilson said in a note that the 4.35% mark (which was touched in trading on Monday) for the 10-year US Treasury has been viewed as "an important technical level" to signal the potential for higher rate sensitivity for stocks.
The key bond yield ended just below that level on Monday afternoon, and yields will be volatile this week as the Fed meets and releases updated forecasts and a new ‘dot plot’ of interest rate bets and the fallout from the Bank of Japan decision settles down.
"We think a key question for this week is whether the direction of rates will begin to matter more for the valuations of large cap equities," the Morgan Stanley analysts wrote in the note.
Share investors have hauled back on their optimistic forecasts for a plethora of rate cuts this year seven at one stage was the stupid guesstimate – now its down to two or three and on Monday Goldman Sachs cut their forecast to three this year and five in 2025.
The change, which brings the forecast in line with the median forecast Fed policy makers made in December, is “mainly because of the slightly higher inflation path,” Goldman economists led by Jan Hatzius said in a March 17 note.
They continue to expect the first rate cut in June, four cuts in 2025 and a final one in 2026, leaving their forecast for terminal rate unchanged at 3.25%-3.5%.
