The 10-year Treasury yield edged higher to 2.908 on Thursday as the capital markets play the waiting game on U.S.-China trade talk news and next week’s potential rate hike, but is the benchmark note close to hitting its ceiling?
The 10-year note has been on an upward trajectory since October of last year, but fixed-income investors are wondering if it still has room to run–some analysts don’t think so.
Source: tradingeconomics.com
“Ten-year Treasury yields may have peaked for this cycle at 3.25%. Tighter central bank monetary policy, a strong dollar and weaker global growth may dampen growth and inflation prospects in 2019, limiting the rise in bond yields,” said Kathy Jones, chief fixed income strategist for Schwab Center for Financial Research.
The Federal Reserve has began to echo remarks of dovishness with next week’s interest rate decision looming. Based on the general consensus in the markets, the central bank is poised to raise interest rates for a fourth and final time in 2018.
Backed by economic data, such as a strong labor force exhibiting increased wage growth and a generationally low unemployment level, a rate hike appears to be certain.
“The Fed’s ability to surprise the market has kind of diminished. They’ve been so transparent. They gave us this playbook that they’re going to follow,” said Boris Rjavinski, director rate strategy at Wells Fargo. “They kept telling us they’re data dependent and the data’s getting a little softer. If you rank it on a relative scale of where the possibility of the greatest surprise would be coming from now, it’s politics. It’s not monetary policy for the time being.”
After next week, however, it’s a guessing game.
Currently, the CME Group’s FedWatch Tool is calculating a 80.1 percent chance the Federal Reserve will hike rates by another 25 basis points. Come March 2019, the algorithm is much more uncertain with a 54.4 percent change of an additional rate hike of 25 to 50 basis points.
The capital markets could be fueling an increasing dovishness by the central bank with a confluence of events stemming from the possibility of an inverted yield curve and trade wars could muddy the once-clear path to rate hikes during the historic bull run seen in U.S. equities. The former, of course, being the one most reverberated especially in the bond markets–the appearance of an inverted yield curve is often associated with a forthcoming recession.
“Once the Fed pauses we will already have an inverted yield curve between two and 10 years, and a consequence of that in our view is U.S. banks will start tightening their lending. The impact of this normally is the end of the cycle,” said Mark Holman, chief executive and fund manager at TwentyFour Asset Management.
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