US yields ticked higher today, advancing for four consecutive days, but gains seemed mild and likely poised for a further decline.
Is Fed done with rate hikes?
Thursday’s gross domestic product (GDP) data is the economic highlight of the week. However, investors remain intensely fixated on the Federal Reserve’s next rate decision at the beginning of February, when policymakers are likely to signal a lower rate increase.
As of Tuesday morning, the CME FedWatch Tool, which acts as a barometer for upcoming Fed rate and US monetary policy, indicated that markets were pricing in a 99.1% possibility of a 25-basis point adjustment.
During the first week of 2023, ETFs collected $9.3 billion in capital. US fixed-income ETFs led the way upward with $9.4 billion in inflows, followed closely by overseas fixed-income ETFs with $2.1 billion in inflows, according to etf.com. Conversely, deposits into US equities ETFs decreased by $2.7 billion.
Fears of a recession drove the shift from equities to bonds since investors view bonds as safer assets during economic downturns. However, a recession looks imminent this year as the world economy struggles with soaring prices, the ongoing conflict in Ukraine, and China’s economic decline.
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According to a Wall Street Journal study, there is a 63% risk of a recession this year. And according to a poll of economists and investors conducted by the Federal Reserve Bank of Philadelphia, forecasts that the gross domestic product will decline in three or four quarters are by far the greatest since the study’s inception in 1968.
Also anticipating an imminent economic downturn are the major banks. More than two-thirds of economists from 23 significant financial firms with direct business with the Federal Reserve predict that the United States will experience a recession in 2023.
As a result, bonds, particularly US bonds, look attractive as investors start to price in more and more rate cuts, pushing bond prices higher.
However, technically speaking, the 10-year US bond yield remains above the 200-day moving average (the blue line near 3.34%), defending the long-term uptrend (downtrend for bonds’ prices).
Moreover, it looks like a triangle pattern, in this scenario, a bullish one. The next upside potential is near 3.8%, while the support for bond yields is seen near 3.34%.
US 10-year bond yield daily chart, source: author´s analysis, tradingview.com