Treasuries Lead Global Bond Rally as Bets on Fed Rate Cuts Soar

A man is reflected on an electronic board showing a graph analyzing recent change of Nikkei stock index outside a brokerage in Tokyo

Markets were shaken on Friday, when the 3-month U.S. Treasury yield exceeded the yield on the 10-year note, an inversion of the yield curve that is widely seen as an indicator of a recession.

Overnight, MSCI's broadest index of Asia-Pacific shares rebounded 0.2% after losing 1.4% in the previous session, though there were some eye-catching moves within that.

Shorter-term rates are more sensitive to interest rate increases, for example, the three-month yield went up to 2.45 percent from 1.71 percent a year ago, mostly driven by the continuous Federal Reserve rate hikes in the last two years.

Mitchell recommended clients continue to "buy the dips" in Treasury prices, and noted downside yield support comes in at 2.34 percent, 2.32 percent and 2.30 percent.

"We think that the recent inversion of parts of the U.S. Treasury yield curve is a bad sign for the S&P 500, which we expect to fall sharply over the rest of this year as growth in the USA economy disappoints", wrote analysts from Capital Economics in a note to clients Tuesday. The yield on the 10-year USA government bond yield lifted 2 basis point to 2.42 percent. These contradicting signs are also supporting the Federal Reserve's late flexibility. This development, known as "inversion" in bond market parlance, happened for the first time since 2007 on Friday.

San Francisco Fed researchers have said that the difference in those two maturities was the most useful for forecasting a recession.

Fixed-income ETFs are in rally mode after a dovish Fed outlook and feeble European economic data pushed bond prices sharply higher and interest rates sharply lower.

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The Treasury Department will sell US$113 billion (RM459 billion) in coupon-bearing supply this week, including US$40 billion in two-year notes today, US$41 billion in five-year notes tomorrow and US$32 billion in seven-year notes on Thursday.

A surprise move by New Zealand's central bank to signal that its next shift would likely be a cut also stoked gains in global bonds.

The Fed Funds futures market is now fully pricing in a possible rate cut by year-end, and we expect that the 10-year U.S. Treasury yield will make a run for the 2.3 percent handle amid month/quarter-end re-positioning flows.

The euro stood at $1.1316, having gained a tad on Monday after Germany's IFO Institute said its business climate index rose to 99.6, beating a consensus forecast of 98.5 and ending six consecutive months of decline. These products won't decline almost as much if interest rates reverse course and they still offer relatively attractive yields.

"There are lingering concerns about the growth prospects in the US", said Alex Li, head of USA rates strategy at Credit Agricole SA.

United States crude futures traded at US$59.26 per barrel, up three-quarters of a per cent on the day, a tad below Thursday's high of US$60.39, its highest since mid-November.

Brent futures were up 0.7 per cent at $US67.73 while safe-have gold was down a third of a per cent at $1317.60 having hit a one-month high of $1324.60 on Monday.

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