Bond Market Outlook

Bond Market Under Pressure as Inflation Rises Above Expectations

    The US consumer and core consumer price indexes increased by 0.4% in February, and by 3.2% and 3.8% annually, while core services inflation excluding rents increased by 0.5% annually, and by 6.8% over the past three months, up from 6.7% in January. For the second month in a row, inflation data has risen more than expected, lowering the market's estimate of the Federal Reserve's chances of initiating a rate cut in June to 59.8%.

Fed's cautious stance, yield oscillating

    Last week, Federal Reserve Chairman Jay Bauer testified before Congress that although there is no point in time for a rate cut, it also allayed the market's fears that rates could rise further, allowing US bond prices to recover. However, Bauer also emphasized that the Federal Reserve Board will continue to take a cautious approach to assessing the timing of rate cuts, so it is expected that the March FOMC meeting to release the possibility of rate cuts low, the yields will oscillate around 4.2%.

Economic Pressure, Rate Cut Chance Remains High

    As economic pressures gradually emerge and inflationary pressures continue to diminish, the probability of a rate cut this year remains high. Therefore, overall, the bond market is still on the long side this year.

Investment-grade bonds offer promising medium- to long-term prospects

    The U.S. non-farm payrolls report in February was mixed, and most other economic data were weak, coupled with Bauer's congressional testimony that he was more confident in lowering interest rates. In addition, although the ECB kept interest rates unchanged, it also affirmed that inflation is cooling rapidly. Therefore, investment-grade bond yields were inspired to fall significantly, and the rate of increase was better than that of non-investment-grade bonds. U.S. investment-grade bonds rose across all sectors, with energy, communications, and healthcare leading the way, while aviation and leisure saw relatively modest gains.