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US Treasury prices climbed on both ends of the curve, pushing the 10-year yield to the lowest level in three weeks, as the reflation trade that has dominated markets cooled.
Wall Street ended last year optimistic that the policies of Donald Trump would boost economic growth and inflation, something that sparked a deep sell-off in the bond market. However, in recent weeks those expectations have ebbed as the Trump administration has quickly become lodged in a legal battle over a controversial travel ban, and economic indicators have looked a bit less rosy.
“Reflation trades remains under pressure,” said Dennis DeBusschere, head of portfolio strategy at Evercore ISI, pointing to a slowing in global economic indicators, weakness in the dollar and the fall in Treasury yields.
In particular, last Friday’s US jobs report that pointed to a slowdown in the pace of wage growth in January garnered the attention of many fixed income investors. It also knocked down market expectations for a potential Federal Reserve rate rise in March to about 8.9 per cent, according to CME Group data on federal funds futures.
“Friday’s jobs report showed sluggish wage growth and further slack in the labour market, thereby giving the Fed more leeway to be cautious,” said Praveen Korapaty, head of interest rates strategy at Credit Suisse.
The US 10-year yield fell on Wednesday as much as 3.3 basis points to 2.36 per cent, the lowest level since January 18, according to Reuters data. The 10-year yield closed last Thursday at 2.43 per cent.
Meanwhile, at the shorter end of the curve, the two-year yield, seen as particularly sensitive to monetary policy, slipped 1.2bps to 1.16 per cent. The 30-year yield declined by 2.8bps to 2.99 per cent.
Still, Mr Korapaty reckons that markets have perhaps become too complacent in handicapping such low odds of a March increase.
“We think too little is priced for March given the potential for further hawkish Fedspeak,” he said, pointing to comments last week from the San Francisco Fed head indicating that the central bank does not necessarily need to wait for clarity on Mr Trump’s fiscal policy to continue tightening policy following the December 2016 rate increase.