Skip to content

Full reversion

Picture of François Christen

François Christen

Chief Economist

The FOMC, many symptoms of economic slowdown and the Treasury trigger a sharp fall in dollar yields.

Original article published in French on agefi.com

A potentially explosive week ended with an implosion of yields, which fell sharply under the influence of an astonishing combination of factors acting in the same direction. Euphoric Wall Street celebrated the bond market’s rally with its best week of the year.

After briefly exceeding 5%, the yield on the 10-year T-Note fell to 4.5% last Friday, following the publication of a weaker-than-expected employment report. October’s 150,000 job creations and rise in the unemployment rate to 3.9% reflect a gradual rebalancing of the labor market. The increase in claims for unemployment benefits (217,000 according to the latest weekly figures) corroborates this observation.

On the other hand, the increase in job vacancies to 9.55 million is fuelling hopes of a “soft landing”, leading to an expansion that is “neither too hot nor too cold” (Goldilocks). Wage indicators support this diagnosis, as do average hourly earnings (up 0.2% in October, 4.1% year-on-year). More reliably, the employment cost index and “unit labor costs” are showing moderate growth, providing comfort to central bankers.

Unsurprisingly, the FOMC left its key interest rate unchanged last week. The statement includes a “hawkish bias”, but Jerome Powell’s words have reinforced the view that the Federal Reserve will not proceed with the threat of a higher rate hike that figured in the projections unveiled in September. By referring to significant progress on the inflation front and a tightening of financial conditions, the Fed boss has bolstered the case of those who believe that the cycle of interest rate hikes is definitively over.

In addition to Jerome Powell’s conciliatory stance, economic indicators played an important role in last week’s decline in yields. The fall in ISM PMIs (46.7 in October after 49 in September for the manufacturing index, 51.8 after 53.6 for services), the deterioration in consumer confidence and the cooling of the labor market mentioned above all point to a sharp slowdown after the surge seen in the third quarter.

Some believe that the “QRA” – the Quarterly Refunding Announcement by the US Treasury – has played a central role in the decline in yields that took place last week. This point is questionable, but the downward revision of the amounts to be borrowed during the fourth quarter has helped to allay the fears of those who believe that the recent rise in real yields sanctions US fiscal laxism.

In short, the bond rally (i.e., the decline in yields) is well supported by recent fundamental news, but Wall Street’s enthusiasm seems overrated. A soft landing for the US economy is not a foregone conclusion. The risks of recession or stagflation remain. The downturn in long-term yields is such that it is once again preferable to favour bonds with short and intermediate maturities (up to 7 years). On the other hand, the rally in long-term bonds and equities lends itself to opportunistic profit-taking.

Macro

After three misses, the Fed has a problem

Evidence of persistent inflationary pressures in the US is pushing government bond yields higher.
Read More →
Corporate

2023 ANNUAL REPORT

ONE swiss bank SA publishes its 2023 Annual Report.
Read More →
Macro

The monetary hawk, an endangered species

Increasing central bank dovishness pushed US and European government bond yields lower.
Read More →
Macro

“Higher for longer”, the sequel

Recent events are likely to confirm the FOMC's wait-and-see stance, which is not without its dangers.
Read More →
Macro

Will two doves make a summer?

Friendly comments by Jerome Powell and Christine Lagarde foreshadow first interest rate cuts in June.
Read More →
Macro

Wall Street peaks, but the economy falters

Recent, but not yet conclusive, indicators point to a deterioration in the US economy.
Read More →
Macro

The Fed and the ECB are in no hurry

The US central bank's patience is fully justified, but the ECB's wait-and-see attitude is questionable.
Read More →
Macro

Renewed realism and healthy correction

Investors have reassessed the prospects for interest rate cuts amid sticky US “core” inflation.
Read More →
Corporate

H2 and Full-Year 2023 Financial Results

2023 was another successful year for ONE swiss bank SA, brimming with achievements and culminating in healthy financial results.
Read More →
Macro

The Fed’s pivot? Not before May 1st

Powell's comments and the strength of the US economy invite investors to be patient.
Read More →