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Can you break the upward shackles? Us bond yields hit a two-month high next week, the Battle of the Gods is coming.
Sep 18,2021 10:28CST

Us bond yields, which have been stagnant since the second half of the year, seem to have finally ushered in the dawn of a tiger ahead of the Fed's interest rate week: on Friday (August 17), 10-year Treasury yields rose for the third day in a row. at one point in intraday trading, the highest level since July 14, while the weekly line closed higher for the fourth week in a row, the longest rally since March.

By the end of the day, the yield on the 10-year Treasury note was up 2.46 basis points at 1.368%. In terms of other cyclical yields, the yield on 2-year Treasuries fell 0.12 basis points to 0.232%, the yield on 5-year Treasuries rose 2.03 basis points to 0.867%, and the yield on 30-year Treasuries rose 1.47 basis points to 1.902%.

From a technical point of view, there is no doubt that benchmark US bond yields are in front of another key "crossroads": 10-year Treasury yields have risen strongly above their 200-day moving average after surging on Friday.

At the same time, the current high level of yields is precisely a key pressure level for US bond yields over the past two months. Since mid-August, the rise in 10-year Treasury yields has fallen three times in that pressure zone. Whether the upward shackles can be broken this time will undoubtedly attract attention again.

On the news side, Thursday's strong U. S. retail sales figures have recently rekindled the enthusiasm of bond bears. Us retail sales rose 0.7 per cent in August, far exceeding market expectations for a drop of 0.8 per cent. Retail sales, excluding cars, rose 1.8 per cent in August, the biggest increase in five months. Subsequently, the consumer confidence index of the University of Michigan released on Friday also rose slightly to 71 in September, up from 70.3 in August.

"my feeling is that no one really wants to make a particularly aggressive position allocation before next week," said Guy LeBas, chief fixed income strategist at Janney. But the U.S. bond market is slowly exhausting the post-CPI rally. Earlier this week, a rally triggered by a lower-than-expected CPI in the US pushed the yield on 10-year Treasuries to a three-week low.

The "decisive moment" is coming next week.

For US bond bears, whether they can really break the technical pressure level ahead of the 1.40 per cent mark may depend on the arrival of the central bank's "super week" next week.

The interest rate meeting of the Federal Reserve Board on September 21-22 is undoubtedly a top priority. Investors will want more information about slowing asset purchases from the Fed's decision, which will also provide a rough timetable for the next rate hike. Some Fed officials have previously said that the Fed will begin to scale back its stimulus measures during the epidemic this year, and Federal Reserve Chairman Colin Powell is likely to echo this view, while stressing that an interest rate hike is still a long way off.

Jonathan Petersen, a market economist at Capital Macro (Capital Economics), wrote in his latest research report, "although we doubt whether FOMC will make a plan to reduce asset purchases, given the growing cyclical inflationary pressures, the new economic forecast may give people some understanding of its response mechanism."

"our view remains that US inflation will remain high for longer than FOMC and investors currently expect, supporting higher US bond yields and a stronger dollar," he added.

In addition to the Fed, the central banks of Japan, Sweden, Brazil, the UK, Switzerland, Norway and Turkey will also meet next week to discuss monetary policy. Among them, the Norwegian central bank's interest rate decision next Thursday will also attract considerable attention, as the bank is likely to become the first G10 central bank to raise interest rates.

In terms of Treasury auctions, the US government will sell $24 billion in 20-year notes next Tuesday and $14 billion in 10-year inflation-protected bonds next Thursday.

In addition, whether progress can be made on the US debt ceiling will also be a big concern next week. House Majority Leader Steny Hoyer said in a schedule notice issued on Friday that the House of Representatives will vote next week on a temporary spending plan that must be passed so that the government can continue to operate after the end of the fiscal year ending September 30, and will also vote on the debt ceiling. But a Democratic aide said no decision had been made on whether to include debt ceiling provisions in another bill.

The US Treasury has warned that the government could default sometime in October if Congress does not act. Senate Republicans have said they will vote against raising the ceiling, leaving Democrats to deal with the issue on their own. This means that if normal procedures are followed, the proposal to raise the debt ceiling will be rejected because it requires at least 60 votes in the Senate.

At present, the use of overnight reverse repo agreements by the Federal Reserve hit another record high on Friday. The 79 participants used a total of $1.218 trillion, surpassing the previous record of $1.19 trillion set on Aug. 31. The tool provides approved fund managers with the option to provide overnight loans to the Fed in exchange for Treasury collateral. The borrowing rate in the overnight repo agreement market is 5 basis points.

The record amount of reverse repurchase shows once again that there is a lot of cash in the bank safe with nowhere to go. The US Treasury has reduced Treasury issuance in the past few months as it approaches the debt ceiling, further increasing demand for money market assets as investors scramble for places to store cash.

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