The minutes of the Federal Reserve's May meeting released on Wednesday showed that many policymakers questioned whether the policy was strict enough to reduce inflation to the target level. As a result, US Treasuries fell, led by short-term US Treasuries. The data shows that the yield of two-year US bonds rose by about 5 basis points to 4.88%; The yield of 10-year US Treasury bonds rose 1 basis point to 4.43%.
The minutes of the meeting showed that although the participants assessed the policy as "well positioned", many policymakers mentioned that they were willing to further tighten monetary policy if necessary. However, the discussion mentioned in the meeting minutes took place before the release of US CPI data in April. This inflation data shows that the price pressure has cooled for the first time in six months, which helps explain why the market reaction is relatively mild.
Ian Lyngen, head of US interest rate strategy at BMO Capital Markets, said: "Although the minutes of the meeting were 'firm and tough', the current inflation trajectory is not considered as terrible as that prevailing at that time."
The inflation data released last week prompted the market to re price sharply, and investors bought US bonds in anticipation of the imminent interest rate cut by the Federal Reserve. Since then, however, traders have lowered their expectations of the Federal Reserve cutting interest rates this year. At present, the swap market expects the Federal Reserve to cut interest rates by 38 basis points this year, down from 42 basis points at the end of last week.
After the minutes of the meeting were released, Nomura Securities economists revised their forecasts of the Federal Reserve's monetary easing policy. They said that "the threshold for interest rate reduction seems to have risen". They now expect the Federal Reserve to cut interest rates for the first time in September, instead of July, as previously expected.
Earlier on Wednesday, after the US $16 billion 20-year bond auction, the yield curve continued to flatten, and the yield was basically close to the pre auction level, indicating strong demand. The large transactions shortly after the auction are also in line with the flattening of the bet yield curve.
However, Ed Al Hussainy, interest rate strategist of Columbia Threadneedle Investment, said: "The yield curve may be further inverted. The market expects the Federal Reserve to hold its ground for a longer time, and the risk of weak labor market is increasingly likely to destroy long-term bond yields."
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