Global Bond Market Faces Pressure Amid Fed’s Speculation

The world’s largest bond market continues to experience pressure as traders analyse a flurry of remarks from Federal Reserve speakers, speculating that policymakers will refrain from hastily cutting rates.

In anticipation of Jerome Powell’s speech, US two-year yields edged closer to the 5% mark, extending the dollar’s rally for a fifth consecutive session. Equities faced challenges following their worst consecutive selloff in over a year.

Chris Senyek, from Wolfe Research, noted, “Powell is likely to set the near-term market narrative,” highlighting the unpredictable nature of the Fed Chair’s remarks.

Krishna Guha, of Evercore, emphasised the significance of Powell’s remarks, particularly amidst strong economic data. Guha suggested Powell may combine reassurance on disinflation with acknowledgement of recent economic trends.

The S&P 500 hovered near 5,050, with Bank of America Corp. experiencing a decline due to higher-than-expected charge-offs for soured loans. In contrast, Morgan Stanley saw gains as traders delivered robust revenue. UnitedHealth Group Inc. led the Dow Jones Industrial Average in gains following its positive results.

Treasury 10-year yields reached a new high for 2024, while the dollar headed towards its largest five-day gain in over a year.

With recent economic developments in the US, Powell’s tone becomes pivotal, according to Win Thin and Elias Haddad at Brown Brothers Harriman. They anticipate a potentially more hawkish stance from Powell, aligning with the market’s expectations for tightening.

Mohamed El-Erian highlighted global authorities’ challenges in responding to a strengthening dollar and rising US interest rates.

Federal Reserve Vice Chair Philip Jefferson emphasized the need for sustained efforts to restore 2% inflation, while Mary Daly of the San Francisco Fed reiterated no urgency in adjusting interest rates, citing strong economic growth and elevated inflation.

After initially pricing in up to six rate cuts in 2024, traders now doubt any significant reductions. Most Wall Street economists have adjusted their forecasts accordingly, signalling potential challenges for US yields.

Despite prevailing market sentiment, State Street Global Advisors maintains a contrarian view, calling for a Fed rate cut as soon as June. Chief Investment Officer Lori Heinel cited inflation concerns and the potential impact on the presidential election.

As the stock market faces heightened volatility, investors’ high exposure to stocks poses risks. With a significant portion of long positions in a loss, investors may face challenges in managing market downturns.

BlackRock Inc.’s Robert Kapito sees potential for the stock market to benefit from investors deploying excess cash holdings, signalling confidence in the resilience of the global economy and corporate profits.

While rising bond yields may dampen expectations for rate cuts, market observers remain optimistic about the earnings-driven growth of the stock market in the current business cycle.