Expectations that the global economy has avoided the worst-case coronavirus pandemic possibilities have culminated in a sharp sell-off from their historic peaks in US government bonds, driving the yield curve to its steepest point since March.
Next week, creditors will be offered a opportunity to see how the US Federal Reserve fits with their confidence. The two-day meeting of the US central bank, which ends on Wednesday, would be the first since April when Fed Chairman Jerome Powell said the US economy could feel the weight of the global shutdown for over a year.
The meeting will follow a strong increase in yesterday’s closely monitored employment report from the Labor Department that has lifted the 10-year Treasury yields index to the maximum since early March. In fact, Societe Generale ‘s head of US rates strategy said last few weeks, the sell-off on the bond market seems to be justified, Subadra Rajappa.
While the Fed could implement additional bond-buying programs known as quantitative easing or yield-curve control measures to target short-term rates, fund managers say they expect yields to rise substantially to justify any intervention in the bulk of the curve. Rather, they watch for hints that the central bank believes the worst part of the coronavirus crisis is gone.
Ed Al-Hussainy, senior interest rate analyst at Columbia Threadneedle, wants the Fed to rely on its recently implemented Main Street Loan Initiative to finance pandemic-related small and medium-sized businesses, instead of implementing major new stimulus initiatives.
The ISM manufacturing index increased from 41.5 in April to 43.1 in May, while weekly jobless claims fell from 2.126 million the week before to 1.877 million.
NatWest Markets senior US economist Kevin Cummins stated that the recent US economic reports have been uniformly weak, though not worse than expected.
Eddy Vataru, Osterweis Capital Management’s lead fund manager, said the Fed’s greater danger is that the levels stay too small, rendering it doubtful there would be a substantial drive towards yield curve-control steps. As a result, he moves into corporate debt and mortgage-backed securities and shies away from Treasuries, which he said at their current yields has no investment value.