“The 10-year U.S. Treasury yield fell below the 4% mark, sparking a wave of bargain hunting in the bond market,” reports Reuters. After a sell-off in the U.S. bond market last week, traders are now looking to buy overnight. The previous week saw investment banks like Goldman Sachs and JPMorgan Chase betting against long-term U.S. debt, but Tuesday’s market data showed a significant drop in bond yields. The 10-year U.S. bond yield briefly fell below 4.0%, giving up most of the gains from the previous week.
There were several factors behind the sell-off last week, including Fitch’s downgrade of the U.S. AAA sovereign credit rating, the U.S. Treasury Department’s announcement of a peak in bond issuance, and speculation about adjustments to the Bank of Japan’s YCC policy causing capital repatriation to Japan. However, the rebound in the bond market overnight was supported by positive fundamentals.
One reason for the surge in U.S. debt on Tuesday was the stimulation of risk aversion. Moody’s rating action on U.S. banks and weak Chinese trade data drove investors to seek safe-haven assets like U.S. Treasuries. Stocks in the U.S. fell on Tuesday due to negative news in the banking sector and concerns about global financial stability. Moody’s downgraded the credit ratings of 10 small and mid-sized U.S. banks, reigniting fears over lending conditions and the ability of the banking system to withstand rising interest rates.
The first wave of U.S. bond auctions also contributed to the rebound in the bond market. The auction of three-year U.S. Treasury notes saw strong buyer demand, with the bonds auctioned at a yield almost two basis points below the trading yield before the auction. The bid-to-cover ratio was also the highest since May, indicating strong demand.
The relatively dovish speeches of Federal Reserve officials before the release of key U.S. CPI data on Thursday also influenced bond yields. Philadelphia Fed President Harker suggested that the Fed may keep interest rates unchanged, while Governor Bowman noted the need for further rate hikes to address inflation. The final trend of U.S. bond yields will likely depend on the latest CPI data to be released on Thursday, as investors closely watch for any signs of a revival in interest rate hike expectations.
Overall, the rebound in the bond market is attributed to a combination of factors, including risk aversion, strong demand in bond auctions, and dovish statements from Fed officials. However, the upcoming CPI data release will be crucial in determining the future direction of U.S. bond yields.