The Strategist

High volatility in US government bonds with longer maturities likely to remain in 2024

Once it became clear that the pressure on policy rates at the short end of the yield curve was likely to ease as a result of fewer rate hikes to come, the focus shifted more to rates at the long end from mid-2023 onwards. Factors such as a solid economic performance and robust labour market contributed significantly to the accelerating upward pressure, which eventually culminated in ten-year US government bond yields breaching the 5% threshold at the end of October.

Simon Weiss, LGT
Tempo di lettura
10 minuto
© Shutterstock

Since then, the trend has reversed and interest rates have fallen again in recent weeks. In our view, one of the triggers for the start of the recent move lower in long-term Treasury yields was the latest meeting of the Federal Open Market Committee (FOMC) in early November. The target range for the federal funds rate was left unchanged at 5.25% to 5.50%, as widely expected, while the comments on the future path of interest rates were hawkish, in line with previous speeches. However, unlike in the past, the market doubted the Fed’s willingness to follow up this communication with action.

Economic cooling

Moreover, the latest data point to an economy that is increasingly showing signs of the long-awaited slowdown. This is also true of the latest inflation figures, which is why we attribute part of the fall in yields to this factor. If the slowdown in the US economy continues at a moderate pace, we believe that the Fed will maintain its hawkish rhetoric for the time being and that hopes of a first rate cut in the near future will prove too optimistic. Based on previous statements by Fed Chairman Jerome Powell, we see a certain willingness to risk a sharper economic slowdown rather than allow inflationary tendencies to flare up again.

High uncertainty

The market's tendency to over-interpret individual data points or statements has become more pronounced in recent months, as reflected in increased interest rate volatility. There are specific reasons for this, related on the one hand to the slowdown in economic momentum, but also pointing to the expected turn in interest rates by most of the world's major central banks next year. In other words, we are currently in a situation of great uncertainty regarding the future path of interest rates. We therefore feel it is important to point out that, in our view, the current decline in longer-term US interest rates will not be a one-way street. After the strong downward movement of recent weeks, we believe that temporary counter-movements are likely. The only scenario that would argue against such a development would be if future US economic indicators were to fall well short of expectations, thus necessitating a significant reduction in the federal funds rate in the foreseeable future.