An increasing number of industry insiders seem to be realizing that the next rate cut by the Federal Reserve is becoming increasingly distant!

Numerous bond traders are currently preparing to cope with further volatility in the U.S. Treasury market, as options betting indicates, $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ it is expected to surge to 5% by the end of February, a level not reached since October 2023.

In fact, the current long-term bond yield is already not far from this critical level.

As of the end of Tuesday's New York session, yields on U.S. Treasuries across various maturities have once again collectively risen. Among them, $U.S. 2-Year Treasury Notes Yield (US2Y.BD)$ Increased by 1.7 basis points to 4.302%. $U.S. 5-Year Treasury Notes Yield (US5Y.BD)$Increased by 3.5 basis points to 4.47%. $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ Increased by 5.9 basis points to 4.69%. $U.S. 30-Year Treasury Bonds Yield (US30Y.BD)$ Increased by 6.9 basis points to 4.916%.

From the Hold Positions data, as the U.S. Treasury Notes Yield has soared recently, short positions in the futures market have also been continuously increasing.

In the past five trading days, the open positions of U.S. Treasury Futures contracts with a maturity of 10 years or more have risen daily, and there has been an expansion on eight out of the last nine trading days. During the market sell-off, the increase in the number of open positions indicates that investors are increasing their Put bets.

The latest sell-off in the bond market on Tuesday was triggered by inflation concerns arising from economic data.

Data released by the Institute for Supply Management (ISM) on Tuesday showed that due to strong demand, the U.S. non-manufacturing PMI rose from 52.1 in November to 54.1 in December, exceeding market expectations of 53.3. The so-called hard data, including consumer spending, indicates that the U.S. economy performed robustly in the fourth quarter.

In terms of component indices, the indicators measuring payments for raw materials and services rose more than 6 points to 64.4. The recovery in business activity and the increase in orders indicate strong demand, exacerbating concerns that inflation will persist.

Additionally, the job openings and labor turnover survey (JOLTS) data released by the U.S. Bureau of Labor Statistics on Tuesday also showed that the number of job openings increased from the revised 7.83 million in October to 8.1 million in November, a result that exceeded the expectations of all economists surveyed in the industry.

The newly added job openings predominantly came from the professional and business services sector, as well as the finance and insurance industry. However, the number of job vacancies in Lodging, food services, and manufacturing sectors decreased.

Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, stated that this gives the impression that the U.S. economy is accelerating again. Positive seasonal factors may make the data appear stronger than it actually is. This is the real factor driving the trend in U.S. Treasuries.

Tracy Chen, a portfolio manager at Brandywine Global Investment Management, mentioned that this data reinforces the market's view that the U.S. economy is strong and interest rates have moved away from restrictive ranges.

As the pressure on U.S. Treasuries continues to expand, the $39 billion 10-year Treasury bond auction conducted by the U.S. Treasury on Tuesday also saw weak demand again, with the winning yield for this 10-year Treasury auction being 4.680%, marking a new high since August 2007, significantly higher than the last auction (December 11) which had a winning yield of 4.235%. This was also the first instance since October of last year where a tail spread occurred, with the winning yield being 0.2 basis points higher than the pre-issue yield.

The next rate cut seems a long way off.

In fact, just at the end of September last year, traders fully expected the Federal Reserve to cut rates again in March, but now, it seems that people are increasingly uncertain about when the next rate cut will happen.

From the movements in the interest rate swap market, as several U.S. data points were hot on Tuesday, traders are no longer betting fully that the Federal Reserve will cut rates by the end of July.

Deutsche Bank's chart shows that among the 14 Fed easing cycles since 1966, this cycle is currently the second worst for 10-Year Treasury Notes performance.

Since the Fed began raising interest rates in mid-September last year, the yield on 10-Year Treasury Notes has climbed about 100 basis points. The only previous period with weaker performance was in 1981, at the end of the Volcker era inflation-squeezing policy path, when Fed policies and interest rates experienced significant fluctuations.

Currently, many industry insiders also expect that as long as inflation remains above the 2% target, the Fed will be more cautious about further rate cuts this year.

Dan Mulholland, head of interest rate trading and sales at Crews & Associates, said, "The market is indeed digesting higher terminal rates, and the level currently being digested is around 4%—which is only 25 basis points away from the current federal funds rate level."

It is worth mentioning that at the American Economic Association (AEA) conference held last weekend in San Francisco, several prominent economists present believed that the Fed is likely to remain inactive this year, even if a rate cut might occur only once.

Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, stated that Federal Reserve Chairman Powell and his colleagues have already signaled a "clear pause in interest rate hikes" during the December meeting.

At that time, the Federal Reserve stated in its policy declaration that it would reassess economic conditions "to consider the degree and timing of further adjustments to policy."

Zentner believes that this statement means: "If we are to take other actions, we will inform everyone"—which communicates a firmer tone than merely discussing skipping a meeting.

Jason Furman, a former senior economist in the Obama administration and current professor at Harvard University, believes that if the labor market remains healthy, the Federal Reserve may only lower the benchmark interest rate once this year.

He also pointed out that the Federal Reserve has entered a new phase where it "needs a reason" to cut interest rates. Last year, the Fed's view was that "everything is fine, so why not cut rates."

Bill Adams, a strategist at Comerica Bank, stated, "The Fed is likely to shift from lowering rates at each meeting between (originally expected) September and December to a long pause in rate cuts until 2025."

Once the yield on the 10-Year T-Note, acting as the "global anchor for asset pricing," remains elevated for an extended period against the backdrop of impeded rate cuts, it will inevitably place pressure on other assets.

This was actually reflected in Tuesday's market trends: $Nasdaq Composite Index (.IXIC.US)$ and $S&P 500 Index (.SPX.US)$ The closing fell by more than 1%.

"An increase in yield doesn't necessarily indicate a problem for the stock market," said Kenny Polcari, a strategist at SlateStone Wealth, "but if inflation rises, then an increase in yield will become problematic."

As mentioned by the well-known financial blog site zerohedge, investors may need to pay attention again to when this crocodile mouth (the decoupling of the inverse relationship between U.S. Treasury yields and U.S. stock performance) will suddenly close?

Editor/danial