Skip to content

T-Notes at rock-bottom prices are sold out

Picture of François Christen

François Christen

Chief Economist

The collapse of US dollar long-term yields in November is an invitation to opportunistic "profit-taking".

Original article published in French on agefi.com

Like children, Wall Street loves a story, even a fanciful one. The latest, told by a facetious hedge fund manager, evokes the prospect of a Fed funds rate cut as early as next March. In line with this prognosis, the structure of dollar-denominated interest rates continued to sink, driving the yield on the 10-year T-Note close to 4.25%. In these circumstances, our tactical call to “buy duration” is outdated. On the contrary, the collapse in yields invites us to “take profits” on long-term bonds.

Admittedly, the downturn in yields is partly underpinned by recent economic news. Inflation as measured by the Personal Consumption Expenditure (PCE) price index slowed to 3.0% in November. Excluding energy and food, the price index showed a variation of 0.2% on the previous month and 3.5% year-on-year. The 2% target has not yet been reached, but the 2.5% annualized increase observed over the last six months is close to the Federal Reserve’s objective.

Activity indicators are mixed. Consumer confidence picked up in November, but the ISM manufacturing index, unchanged at 46.7 in November, reflects a contraction in activity, orders and employment. The bewildering increase in house prices, up 3.9% year-on-year, is a paradox, but can be explained by a concomitant decline in supply and demand triggered by rising mortgage interest rates.

Several US central bankers have spoken out ahead of the “blackout” period preceding next week’s FOMC meeting. Statements by Christopher Waller, Michelle Bowman and Jerome Powell tend to confirm that interest rates will not be raised further, provided inflation continues to fall as expected. All agree that it is too early to speculate on monetary easing, but this message has not been assimilated by investors, who are counting on a rapid and significant “pivot” next year.

Ironically, the surge in stock market indices, the fall in yields and the decline in credit risk premiums associated with corporate bonds imply a strong easing of financial conditions, in contrast to the situation prevailing at the end of October. The FOMC could therefore be less supportive next week, in an attempt to temper expectations of interest rate cuts. Among the “data” that will influence the FOMC’s stance, the employment report due on Friday could have a strong impact on dollar yields and financial markets in general. Strong figures could trigger a significant rebound in yields. On the other hand, a weaker reading could confirm investors’ expectations of a rapid fall in interest rates.

In Europe, euro-denominated bond yields are under pressure. The 10-year German Bund has fallen near 2.35 %. The sharp downturn in inflation observed in November across the eurozone (-0.5% monthly, 2.4% year-on-year; respectively -0.6% and 3.6% excluding energy and food) is fueling hopes of a fairly rapid turnaround on the part of the ECB. In Switzerland, the Confederation’s yield fell to around 0.75%, a far cry from the 1.6% level seen at the start of the year. The decline in annual inflation to 1.4% puts the SNB in a comfortable position: its mission is largely accomplished.

Macro

A small move before the summer break

Recent economic data do not support an aggressive cut in ECB-controlled interest rates.
Read More →
Macro

The calm before a potential storm

April's US inflation figures, which were worryingly sticky in the first quarter, are particularly important.
Read More →
Macro

Should we celebrate bad news?

Wall Street and the bond market welcome the emergence of many signs of cooling.
Read More →
Macro

The prospect of higher rates forever

Government bond yields stabilise, but a major monetary policy reversal remains unlikely.
Read More →
Corporate Social Responsibility

2023 SUSTAINABILITY REPORT

After our recent delisting, we remain sincerely committed to transparency and to continuing our efforts to progress on environmental, social and governance (ESG) matters.
Read More →
Macro

Powell capitulates under the weight of evidence

Persistent inflationary pressures call for patience from the Fed, but a rate hike remains unlikely.
Read More →
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 →