On the first trading day following the Columbus Day holiday, U.S. Treasury bond prices experienced a significant surge on Tuesday. The reason for the decline in yields across all maturities is not hard to find— not only were the U.S. manufacturing data announced that day sharply down, but oil prices also suffered heavy losses for two consecutive days...
Market data shows that U.S. Treasury yields closed lower across the board overnight, with the 2-year U.S. Treasury yield falling by 1.2 basis points to 3.956%, the 5-year U.S. Treasury yield falling by 5.2 basis points to 3.861%, the 10-year U.S. Treasury yield falling by 7.3 basis points to 4.038%, and the 30-year U.S. Treasury yield falling by 9.7 basis points to 4.323%.
Against the backdrop of the Federal Reserve's interest rate cut expectations continuously shrinking and signs of a resurgence in U.S. inflation, Tuesday's substantial rebound in U.S. Treasury bond prices is clearly a rare occurrence in recent weeks. However, looking at the market news overnight, it does not seem surprising that the bond market eventually presented this scenario.
In terms of macroeconomic data, data released by the New York Fed on Tuesday showed that manufacturing activity in New York State fell back into a contraction range this month, with both order and shipment indicators weakening, which contrasts sharply with the strong recovery trend of the previous month.
The data shows that the U.S. October New York Fed Manufacturing Index plummeted to -11.9, with expectations at 3.6. A figure below zero indicates a contraction in manufacturing activity, and the current report is clearly lower than all the forecast values of economists surveyed.
What particularly surprised market participants about this data was the comparison with last month's figures— the September New York Fed Manufacturing Index had reached 11.5, the highest level in 30 months. However, just one month later, this figure plummeted by 23.4 points, with a single-month fluctuation that is staggering.
If the latest New York Fed Manufacturing Index overnight indicates that the U.S. economy, especially the manufacturing sector, is still unstable and the downward pressure on the economy is expected to boost U.S. Treasuries, then the continuous significant decline in oil prices this week also proves the rationality of the U.S. Treasury rebound from another dimension: lower energy prices may help further alleviate inflationary pressures.
Oil prices fell by more than 4% again on Tuesday, touching the lowest level in nearly two weeks, due to weak demand prospects and media reports that Israel will not strike Iran's nuclear and oil facilities, easing market concerns about supply disruptions. Brent crude futures settled down $3.21, or 4.14%, at $74.25 per barrel. U.S. WTI crude futures settled down $3.25, or 4.4%, at $70.58 per barrel.So far this week, both the US and Brent benchmark crude oil prices have fallen by about $5 each, almost erasing all the gains that had accumulated since investors worried that Israel might attack Iran's oil facilities in retaliation for Iran's missile strike in early October.
"We are seeing the war premium that accumulated last week unwinding," said Phil Flynn, a senior analyst at Price Futures Group. "What we are seeing is not a supply issue, but a risk issue of supply and demand."
Previously, against the backdrop of escalating tensions in the Middle East, investors had become increasingly concerned that US price pressures would rise again, and regardless of who is elected the next President of the United States, they might introduce policies that would push up inflation. However, the retreat in oil prices this week has largely eased this concern.
Christoph Rieger, head of interest rate and credit research at Commerzbank, said, "Recently, traders seem to have tied their trading programs to crude oil futures. Whether it is reasonable to adjust long-term inflation expectations in this context is another matter."
Looking at the performance of the "anchor of global asset pricing," the 10-year US Treasury yield, the current battle around the 4% integer level may be particularly crucial. Currently, the 10-year US Treasury yield has risen for four consecutive weeks, touching the highest since July 31 last week at 4.12%.
Jim Barnes, head of fixed income at Bryn Mawr Trust, said, "The upward trend in yields may have reached its limit at the current level, and it only takes a small catalyst to form a soft top at the current level."
"You may need some kind of substantial catalyst to allow yields to continue to rise, and since we do not have such a catalyst now, yields may only fluctuate within a range until we can obtain some evidence that something might affect the Federal Reserve's future actions," Barnes said.
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