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Analysing Recent Trends in US Treasury Bond Yields and Economic Implications

By Samir Al Khoury

After reaching their highest levels since 2007 at 5.25% on October 19, 2023, for the two-year Treasury bond yield, and 5.02% on October 23, 2023, for the ten-year Treasury bond yield, both have seen a decline, currently standing at 4.90% and 4.40%, respectively. However, there are several key considerations:

  • Firstly, an inversion persists in the yield curve between the two-year and ten-year bond yields, with an approximate negative 50 basis points. This suggests the possibility of the United States entering an economic recession or experiencing a gradual decline in the coming year.
  • Secondly, despite the drop in the two-year bond yield, known for its sensitivity to the Federal Reserve’s monetary policy due to recent sluggishness in inflation and job numbers, investors are flocking to these bonds. This is amid expectations that the Federal Reserve has concluded its interest rate hikes and will shift to lowering them in the middle of the next year. However, this hasn’t been confirmed by the Federal President and members of the Federal Reserve, who maintain a cautious tone. They emphasise that the battle against inflation is ongoing, with inflation still distant from the Federal Reserve’s 2% target rate. This leaves room for continued bond fluctuations, with a significant likelihood of the yield surpassing the 5% threshold, pending upcoming US economic data.
  • Thirdly, the decline in the ten-year bond yield, more influenced by the US government’s financial policy, remains a concern. The presence of fiscal imbalance in the United States prompts the US Treasury to persist in issuing or selling long-term Treasury bonds to finance the deficit resulting from outstanding debts. When supply exceeds demand, it puts pressure on bond prices, leading to higher yields.

In conclusion, while there is a decrease in bond yields, the aforementioned points indicate the potential for future increases. Economic uncertainty and ambiguity regarding monetary and financial policy in the United States contribute to this outlook.

From a technical standpoint, there seems to be robust support at a 4.80% level for the two-year Treasury bond yield. Despite attempts to break this level in five sessions, it has proven resilient. This suggests a possible rebound for the yield in the next phase. Notably, there is positive divergence observed: while yields declined, the relative strength index did not record lower levels but remained at higher levels. In the short term, this sets the stage for a rebound process, contingent on the release of economic numbers supportive of yields, albeit at the expense of bond prices.

Please note that this analysis is provided for informational purposes only and should not be considered as investment advice.

Taurex is the trading name of Zenfinex Global Limited, Stochastic Africa SL Ltd, Zenfinex Global LLC, and Zenfinex Limited.

Zenfinex Global Limited is registered in the Republic of Seychelles with registration number: 8428731-1 and is regulated by the Financial Services Authority of Seychelles (license number SD092). Its registered office address is F20, 1st Floor, Eden Plaza, Eden Island, Seychelles.

Stochastic Africa (SL) Limited is a company registered in Sierra Leone with Company Number: SL270319STOCH05271 and is licensed by the Bank of Sierra Leone under license number BSL/SAL/2023 and with the registered office at 148D Wilkinson Road, Freetown, Sierra Leone.

Zenfinex Global LLC is a company registered with the Financial Services Authority in Saint Vincent and the Grenadines under registered number 138 LLC 2019. Its registered office is Hinds Building, Kingstown, Saint Vincent, and the Grenadines.

Zenfinex Limited is a company registered in England and Wales under registered number: 11077380. Authorised and regulated by the Financial Conduct Authority under firm reference number 816055. Its registered office is 4th Floor, 4 Eastcheap, London, EC3M 1AE, United Kingdom.

*All trading involves risk.

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