Treasurys

The Federal Reserve will need to start hitting the brakes on the unwind of its balance sheet as the outlook for the central bank's reserves grows increasingly murky, according to Wrightson ICAP.  

The rally in Treasuries ahead of the Federal Reserve's first interest-rate cut may only just be getting started, according to Bank of America Corp. research.

Treasuries resumed their rally on Tuesday as further labor-market slowdown reinforced speculation the Federal Reserve will be able to cut interest rates next year to prevent a recession.

Whether the rally extends into December and then 2024 depends on if the principal forces behind it — signs that the economy and inflation are slowing and that the Federal Reserve is done hiking interest rates — keep building.

By the end of 2024 traders now see the U.S. central bank slashing rates by a full percentage point, despite officials repeatedly warning markets that they're in no rush to cut rates.

The recent jump is the biggest increase since the run up in the early 1980s, when Paul Volcker's efforts to slay inflation pushed the 10-year yield to nearly 16%.

US 30-year yields dropped seven basis points to 4.79%, unwinding part of Thursday's surge that was driven by a somewhat disappointing inflation reading and a weak bond auction.

The current Treasury yield curve is leading homeowners to pay mortgage rates at least 120 basis points more than they should, equal to an extra $245 a month on a $300,000 loan, their letter said.

Top Fed officials are coalescing around the idea that tighter financial conditions after a recent surge in U.S. Treasury yields may substitute for additional increases in their benchmark interest rate.

"There is nothing that is saying we need to do anything imminent anytime soon," the Federal Reserve governor said in an interview on CNBC Tuesday.

New mortgage bonds now offer yields that are about 1.66 percentage point higher than U.S. Treasuries, according to data compiled by Bloomberg. That's the most relative to corporate bonds in 17 years. 

Stock futures fluctuated on Wednesday as the latest data showed the U.S. economy expanded at a slower rate than previously thought in the second quarter, fueling speculation the Federal Reserve is nearing the end of its rate-hike cycle.

The yield on 30-year securities has climbed almost 25 basis points over the past three sessions, returning it to levels last seen in mid-November when inflation was still above 7%, more than double the current rate. Ten-year borrowing costs rose to around 4.15%. 

In their latest assessment of the bond market outlook, Morgan Stanley strategists are challenging the former head of the Federal Reserve Bank of New York's view that losses are likely to deepen.

Investors are piling into longer-dated notes on bets that policy makers will succeed in taming inflation, an outcome that will deliver strong and stable returns on debt.

Excess returns on the bonds, which compares mortgage backed security performance to Treasuries, are -0.94% for March, on track for the worst relative performance since September.

The U.S. Supreme Court turned away four appeals from shareholders of the government-sponsored enterprises who said they were entitled to compensation after the Treasury collected more than $100 billion in profits from the government-sponsored enterprises.

The Treasuries market is girding for potential disruptions from the next and trickiest stage of policymakers’ tightening campaign: the shrinking of an $8.5 trillion bond portfolio.

Yields have jumped so much this year, nearly doubling those on 10-year Treasuries, that it recalls past buying opportunities that paid off when the tide turned.

The yield on 10-year US notes has traded in a range of at least 10 basis points in 50 of 95 trading days so far in 2022. That puts it on track for an annual rate of more than 130 episodes, which would be the highest since 2009.