The situation in the US bond market has changed rapidly, and it looks like the bull market in yields (the bear market in bond prices) might be over.
As of writing, the 10-year US yield dropped below 3.5% for the first time since September, while the 2-year US yield remained stuck near 4.3%, down from 4.85% reached in November.
Is it the end of the hiking cycle soon?
Investors will surely pay attention to next week’s central banks’ events. Both the Federal Reserve and the European Central Bank are anticipated to raise interest rates once more to combat excessive inflation.
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After indications that inflation may have peaked, however, the Fed might begin to lower the magnitude of its interest rate increases.
In light of this, the focus on Friday will be on US producer price inflation data released later in the day for more insight into the strength of the U.S. economy.
In November, PPI is anticipated to have risen 0.2% month-over-month, with an annual increase of 7.2%, which would be a decrease from the preceding month’s 8.0% increase.
Furthermore, the preliminary December Consumer Sentiment Survey from the University of Michigan will be released.
Is it time to buy bonds?
Many big investment banks are turning bullish on bonds, citing the Fed’s pivot and an economic recession.
Economists at Société Générale reported that signals of a genuine uptrend (in US yields) are not yet apparent; failure to recapture the top achieved earlier this week near 3.80% might result in a continuation of the downtrend.
“Below 3.50%, next objectives are located at 3.38% and the lower band of the channel at 3.25%/3.20%,” they added.
Additionally, economists at Credit Suisse downgraded their tactical objective further to 3.045/00% for the 10-year US yield.
“Assuming the top is confirmed, the potential ‘measured top objective’ suggests a move below 3.00% is possible; however, the rising 200-Day Average at 3.145% should provide a formidable barrier beforehand,” they said in a note.
A downtrend in yields is evident
Technically speaking, the next support for the 10-year US yield is at the 200-day moving average (the blue line), followed by the psychological level of 3%.
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On the upside, the resistance could be at the 21-day moving average (the red line) near 3.65%. Bond yields must advance above that level to start a short-term rally, likely toward the 4% threshold again.
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