Treasury yields surged on Wednesday as speculation mounted that market bets on rate cuts by major central banks may have gone too far. The Bank of Japan’s hawkish signals added to the tension, rattling global bonds, while investors anxiously awaited Friday’s US jobs report.
With less than 24 hours before the crucial data release that will test the market’s aggressive dovish repricing, Wall Street grappled with the news that the world’s last negative interest-rate regime may be coming to an end. The BOJ’s indication prompted a nearly 2% rise in the Japanese yen and pushed yields higher across the board.
Signs of exhaustion emerged after the bond market witnessed one of its best months in decades. Interest-rate strategists at TD Securities recommended taking profits on long positions in 10-year Treasuries ahead of the November employment report, cautioning that yields were “at risk of backing up sharply.”
Mohit Kumar at Jefferies International commented, “Both valuation and positioning would argue for exhaustion in the recent bond rally. Given our view of only a mild recession and inflation still remaining sticky, we would argue that the market has run a bit ahead of itself.”
In a week filled with labor market readings, data revealed that continuing applications for US jobless benefits experienced their most substantial drop since July, albeit in a holiday week following two months of increases. Despite the decline, continuing claims lingered near a two-year high, reflecting growing evidence of a cooling labor market.
US 10-year yields climbed four basis points to 4.14%, while their two-year counterparts remained relatively stable. S&P 500 contracts showed a modest advance, signaling a pause in the benchmark gauge’s three-day decline. Nasdaq 100 futures outperformed, while the dollar retreated.
Easing rate expectations significantly contributed to November’s stock rally. However, a closer examination of cross-asset volatility indicated that risks might not be as subdued as they appear. The gap between the MOVE Index, tracking interest-rate volatility, and the VIX gauge of stock price swings widened once again, suggesting that rate markets remain choppy and could potentially stress equities at any time.
Goldman Sachs strategists, including Ryan Hammond and David Kostin, warned that US stocks already reflected an optimistic outlook on economic growth, making them “vulnerable” to any macro shocks. In their statement, they wrote, “We believe much of the optimistic scenario is already reflected in US equity prices today.”
In conclusion, the trajectory of global financial markets remains uncertain, with the ever-shifting landscape driven by the intensity of market bets on rate cuts, signaling a delicate balancing act for investors navigating the evolving economic landscape.
Source: Bloomberg
