Oil price decline weakens rate hike expectations, US Treasury prices rise, strong demand for two-year bonds auction.

Technology stock pullbacks triggered risk-averse buying, coupled with falling oil prices weakening rate hike expectations, causing US Treasury bonds to rise on Tuesday. On that day, there was a general decline in the global semiconductor sector, sparking concerns among investors about the sustainability of the previous significant rally in artificial intelligence (AI) related stocks. Decreased risk appetite pushed funds towards US Treasury bonds and the US dollar as safe-haven assets. At the same time, international oil prices continued to fall, easing concerns about inflationary pressures in the market and thereby reducing the necessity for further rate hikes by the Federal Reserve. Interest rate swap market data showed that investors slightly decreased their bets on future rate hikes by the Federal Reserve over the next year. The market currently expects a cumulative rate hike of about 45 basis points by mid-2027, which is lower than previous levels. Izaac Brook, capital markets interest rate strategist at Royal Bank of Canada, stated that the market has largely digested the more hawkish Federal Reserve policy expectations. "From the current pricing, the market has fully reflected a more hawkish Federal Reserve outlook." He pointed out that the inflation-adjusted yield on US two-year Treasury bonds has reached its highest level since the start of the rate cut cycle by the Federal Reserve in September 2024, indicating a significant shift in market expectations for future rate paths. Driven by buying interest, US Treasury bond prices rose, with yields across various maturities generally declining by about 1 to 3 basis points. Short-term bonds, which are most sensitive to monetary policy changes, performed the best. By the close of the New York market, the yield on two-year US Treasury bonds had fallen by about 3 basis points to 4.20%; the yield on the 10-year US Treasury bond also saw a slight decline. It is worth noting that the $69 billion two-year US Treasury bond auction conducted by the US Treasury Department that day received strong demand, further supporting the bond market performance. The final bid yield for the auction was 4.189%, lower than market expectations, usually seen as a strong signal of demand. However, this yield is still the highest level since January 2025 for two-year Treasury bond auctions. This auction took place less than a week after Federal Reserve Chairman Kevin Walsh's first monetary policy press conference. At last week's meeting, Walsh sent out a hawkish signal and emphasized the importance of controlling inflation as the Federal Reserve's top priority. Subsequently, the market quickly raised expectations of future rate hikes, and the yield on two-year US bonds surged significantly. Angelo Manolatos, interest rate strategist at Bank of America, stated that in the context of the market already pricing in expectations of nearly 50 basis points of rate hikes over the next year, the current yield levels on two-year Treasury bonds are starting to attract some investors. Manolatos said, "With expectations of nearly 50 basis points of rate hikes over the next year already priced in, investors may see the current two-year Treasury bonds as having value for allocation." This week, the US Treasury Department will continue to issue fixed-rate government bonds. Following the two-year Treasury bonds, five-year and seven-year Treasury bonds will be issued in the next two days. It is worth noting that earlier this week, the yields on the five-year and 10-year US Treasury bonds rose to their highest levels in at least a week, despite falling international oil prices at that time. Some traders believe that this unusual trend may be related to the recent large-scale bond financing by SpaceX. It was reported that SpaceX recently issued a bond financing plan of up to $25 billion. Market participants believe that some investors may have conducted rate hedging operations in advance, thereby putting transient upward pressure on medium-to-long-term US bond yields.