Stand Aside as US Rates Rangebound Until Election

Summary

• US Treasury (UST) yields have risen sharply across the curve, driven by a stronger-than-expected US jobs report last Friday.
• Market pricing of further Fed easing for 2024 aligns with the FOMC’s Summary of Economic Projections (SEP) and our expectations.
• We expect rates to remain rangebound ahead of the elections next month, with the next jobs report and Fed rate decision also clustered around election day.

Market Implications

• Within this rangebound scenario, price action will probably be choppy and volatile.
• Technical indicators are approaching oversold levels, so we prefer to stand aside and await clearer signals before initiating new positioning.

Strong Jobs Numbers Lifted US Yields Further

US yields have been rising across the curve since the FOMC rate cut last month. We argued last week that buyers of USTs would find better levels from which to initiate longs.

Now, a week on, US yields are higher, as we expected, and traded this week at levels not seen since August.

Ahead, early November brings the next US jobs report, the US election, and the next FOMC policy meeting. We think UST yields will trade in a range, contained on the downside by last month’s pre-FOMC lows and on the upside by the yield peaks seen in July and August.

What Will the UST Ranges Look Like in the Coming Weeks?

2-Year UST Yield: range defined by the 25 September low (~3.51%) and the 14 August high (~4.08%).

10-Year UST Yield: range defined by the 17 September low (~3.60%) and the 31 July high (~4.15%).

30-Year UST Yield: range defined by the 17 September low (~3.88%) and the 24 July high (4.55%).

Technicals Show USTs Approaching Oversold

Relative strength indices (RSIs) have all pulled back from pre-FOMC overbought levels. They are now approaching oversold, indicating the rise in yields is tiring.

We like RSIs for their simplicity and ubiquity in the technical analysis world. By this, we mean the 30/70 rule. When an RSI breaches 30 on the downside, the security is oversold. Breaching 70 on the upside indicates overbought.

Last week, with most RSI readings at sub-60 levels, we argued the technical picture for USTs was much cleaner than pre-FOMC (Chart 4).

The short end was more overbought than the longer-dated maturities, but each of the RSIs were elevated enough to make us think further upside in yields was coming.

This week, we see RSI readings approaching 30. We think the technical picture for USTs now points to a partial reversal of the recent, post-FOMC rise (Chart 5).

Given how much the RSIs have unwound from overbought and are approaching the oversold threshold of 30, we argue the recent rise in yields is tiring.

The Market, Fed, and Macro Hive Are Aligned on 2024 Expectations

The other reason for thinking that the recent rise in yields is running out of steam is that market pricing is now aligned with the Fed’s most recent SEP.

Prior to the Fed rate cut last month, the market was pricing considerably more easing than the Fed projections.

That has now unwound, to the point where market pricing (roughly two more 25bps rate cuts in 2024) now reflects the Fed’s base case.

Additionally, market pricing now reflects Dominique’s view. She expects another 50bps from the Fed this year – 25bps next month, and 25bps in December.

Keep Powder Dry Until November’s Event Risk

Given the technical picture and market-Fed alignment, we think the yield rally has run its course in the near term.

Much of the dovish froth around the Fed’s aggressive 50bps cut last month has been washed out of market pricing.

Next month brings the next set of material, market-moving events: the US jobs report on 1 November, followed by the election and next Fed rate decision shortly thereafter.

Until then, we think UST prices will chop around within recently established ranges. As such, we await clearer signals before initiating new positioning in USTs.

Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)