Global bond markets experienced a pause in the recent selloff as traders awaited US inflation data to determine if the Federal Reserve will cut interest rates this year. Treasuries saw gains on Friday following a week of high yields, with European rates also rising. Japan’s benchmark securities also advanced after the nation’s central bank hinted at maintaining easy monetary policy.
There are signs that the slowdown in US consumer price growth towards the Fed’s 2% target has halted, causing the market to delay expectations of a rate cut until the end of the year. This has led to a unwinding of positions that were betting on a rally in fixed income assets.
Market experts are divided on whether this is a temporary blip or a significant inflation breakout. If it is the latter, 10-year yields could potentially surpass 5%. All eyes are now on the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, which is set to be released later on Friday.
US 10-year Treasury yields fell slightly, reaching 4.68%, after hitting a high of 4.74% on Thursday. Traders are now only fully pricing in a quarter-point reduction by December, compared to the previous expectation of a cut in July.
Recent economic data has caused the market to adjust its expectations for lower borrowing costs. GDP increased at a 1.6% annualized rate last quarter, while underlying inflation rose at a higher-than-expected 3.7% rate.
The Fed is set to announce its monetary policy decision soon, with attention focused on Chair Jerome Powell’s commentary on recent economic indicators and the future rate path. In March, Fed officials projected three quarter-point cuts in 2024.
Further clarity on the economy will come from employment data released at the end of next week. Despite the recent data, experts believe that the current inflation momentum is not enough to prompt the Fed to cut rates.
Overall, global bond markets are closely monitoring inflation data and economic indicators to gauge the future direction of interest rates.