Yield rate poised to rise, institutions eyeing for the "bottoming point" of US Treasury bonds: 4.5%

Despite the rise in US Treasury yields earlier this year causing pain for traders, they are still seeking to buy US Treasury bonds because they have always believed that the US economy will eventually slow down in 2024. The performance of the US economy in early 2024 has been better than expected, prompting investors to significantly reduce their bets on a rate cut by the Federal Reserve, resulting in losses for investors who were bullish on bonds at the beginning of the year. The resilience of the US economy has caught traders off guard once again. For some, this is a reason to surrender, as they accept the reality of higher rates for a longer period of time, as well as the possibility of yields rising again - even reaching the high point of 5% seen last year. But for those who are confident that interest rates will eventually trend downwards, the time may have come to increase exposure to the world's largest bond market. Managers from PIMCO, T. Rowe Price, DWS Investment Management Americas, and Bank of New York Mellon Wealth Management are all in this camp. They believe that if the yields on 5 to 10-year US Treasury bonds surge to 4.5%, it will be a highly attractive buying opportunity. PIMCO portfolio manager Michael Cudzil stated that with inflation rates sharply declining from their peak levels last year, "4.5% is equivalent to the 'new 5%,' and is a good time to buy." Indeed, as recent economic data has shown more resilience, some investors have steered clear of the US Treasury market. A fund manager at Fidelity International in Singapore stated last month that he had sold off most of his US Treasury holdings in anticipation of sustained global economic growth. Katy Kaminski, a fund manager at AlphaSimplex Group, was bearish on US Treasury bonds for most of last year, briefly turning bullish in January only to sell off US Treasury bonds once again. Capital Group also does not rule out the possibility of US Treasury yields approaching 5% this year - if the economy overheats and eliminates market expectations of a rate cut. And Apollo Management's chief economist Torsten Slok predicted last Friday that with the US economy reaccelerating and core inflation rising, the Federal Reserve will not cut rates throughout 2024. Last week, US Treasury yields rose as manufacturing activity data fell below expectations and consumer confidence index declined, leading the market to expect three rate cuts starting in June this year. The yield on the 10-year US Treasury bond fell to 4.18%, the lowest level in nearly three weeks, but still far higher than the level of 3.88% at the beginning of the year. NEXT WEEK: Could 4.5% in mid-term US bond rates be a buying point? In the coming week, a wealth of data releases focusing on the US monthly non-farm payrolls report will test the market and may provide new entry points for traders. Additionally, Federal Reserve Chairman Powell will deliver semi-annual testimony to Congress on Wednesday and Thursday. Steve Bartolini, a portfolio manager at T. Rowe Price, said, "If Powell indicates that there will be rate cuts in the second half of this year, it may prompt the market to factor in expectations of two rate cuts. If employment continues to strengthen, your expectations should be that the middle of the yield curve reaches 4.5%." He referred to the yields on 5 and 10-year US Treasury bonds. Ahead of the upcoming Federal Reserve policy meeting later this month, a series of job and inflation data will be released, giving bond investors plenty of opportunities to profit from surging yields. George Catrambone, head of fixed income at DWS, notes that even at current levels, the US bond market's "valuations are more reasonable" because it is now "closer to the Fed's policy outlook for this year." Catrambone favors mid-term US Treasury bonds, particularly as the recent rise in yields on the 5 and 10-year US Treasury bonds has easily surpassed the market's long-term expectation (implied by forward rates) of the Fed's next easing cycle target of 3.5%. Data released last week shows that the Fed's preferred inflation indicator - the PCE price index - slowed to 2.4% in January, below expectations. However, central bank officials hope to see this indicator return to the average level of 2% before considering a rate cut. At present, Bartolini of T. Rowe Price is content to play the "waiting game" and maintain a "patiently lengthened bond position." A rise in mid-term US bond yields above 4.4% would prompt them to buy back and shift from their current selling position. Bartolini said, "The level of 4.4% in the middle of the yield curve is more interesting, as it suggests that two rate cuts have already been priced in." Strategists Ira F. Jersey and Will Hoffman from Bloomberg stated, "If future data continues to be strong, the rate market pricing at the end of 2024 may further transition away from no rate cuts. Although our base assumption is for three non-consecutive rate cuts starting before mid-year, given recent data, we are less certain of this outcome." Such a shift could weaken investors still holding around $6 trillion in money market cash, prompting them to turn towards bonds. Sinead Colton Grant, chief investment officer at Bank of New York Mellon, said, "In our view, a smaller reduction in rates creates a new opportunity for clients holding cash to invest in bonds. You will see volatility, but at this and nearby levels, it is attractive. So yes, you may see yields slightly higher than this level, but relative to the levels of the past 10 years, they are still quite attractive."