Key facts
- The bond market may be headed for a recovery after yields reached their highest levels in years.
- The 10-year US Treasury yield fell to 4.95% on Thursday, down from above 5%.
- The 2-year US Treasury yield declined to around 4.68%.
- The Federal Reserve reiterated its commitment to bringing inflation back to its 2% target.
- Brent crude oil prices sank 3% on Thursday to $102 a barrel.
- JPMorgan Asset Management is purchasing long-dated bonds, viewing current levels as a buying opportunity.
The bond market may be poised for a recovery, with yields on US Treasuries retreating from recent highs. Investors have been navigating a global sell-off in government bonds, which pushed the 10-year US Treasury yield back above 5% after the Federal Reserve's recent rate hike. However, fears surrounding inflation and the fiscal outlook appeared to subside on Thursday, leading to a renewed appetite for US debt. The 10-year bond yield dropped five basis points to 4.95%, moving below the 5% level that has been considered a "danger zone" for stocks. The 2-year US Treasury yield, more sensitive to Fed policy, declined four basis points to around 4.68%. Several factors are contributing to the easing of yields. The Federal Reserve reiterated its commitment to its 2% inflation target, which helped to soothe concerns about rising consumer prices. The rate hike itself may have bolstered the Fed's credibility, quelling some worries about its independence. Inflation expectations, as reflected by the 5-year, 5-year forward rate, fell four basis points to 2.31% on Wednesday, according to Fed data. Strategists at Bank of America noted that the jump in long-term inflation expectations following the July FOMC meeting had completely retraced. Additionally, oil prices have seen a decline. Brent crude, the international benchmark, sank 3% to $102 a barrel on Thursday, and West Texas Intermediate crude also dropped 2%, falling below $100 a barrel. This easing in oil prices comes as concerns about supply disruptions in the Middle East have subsided. Saudi Arabia has made additional oil cargoes available to Asian refiners after an attack on its East-West pipeline. Strategists at JPMorgan suggested that bonds are reacting more to oil prices than to Fed commentary. Bob Michele, global head of fixed income at JPMorgan Asset Management, believes that yields have already reached "maximum pain" and that the bank is purchasing long-dated bonds. He speculated that further progress in Middle East peace negotiations could lead to lower yields. Economist David Rosenberg suggested that the sell-off in government bonds may have been overdone, calling Thursday's decline in yields a "relief rally." JPMorgan strategists believe that the Fed's commitment to containing inflation expectations will help lower yields. Joe Kalish, chief macro strategist at Ned Davis Research, anticipates the 10-year Treasury yield will be significantly lower within the next six to twelve months, assuming the Fed implements only one or two more rate hikes. Bob Edwards, CIO of Edwards Asset Management, stated that the bond market's biggest moves are likely behind it and that current elevated yields present a good opportunity for investors to lock them in.