After another week of strong economic data and low investor confidence, the 10-year Treasury yield rose to its highest level since November.
Commenting on the developments, UBS strategists believe the risk-reward profile is “biased towards lower rates,” although they expect sentiment to “remain volatile on PCE and US employment data next week.”
UBS highlighted that the core PCE deflator increased by a seasonally adjusted 3.7% in the first quarter, exceeding expectations of 3.5%.
That brought the March change in core PCE prices to about 2.8% year-on-year in today’s PCE data, which contrasts with UBS’s earlier forecast of 2.7%.
They have also seen significant market disappointment over the past four months among investors who missed out on the opportunity to buy the 2.50% U.S. real yield in October, “so we think it will be difficult for the 10-year real yield to rise above 2.40%,” they write.
“This means any sharp move would be heavily dependent on changes in breakeven inflation, which is already within a few basis points of the lowest levels since October,” UBS strategists commented.
“We think the US Treasury will likely announce a new buyback program on May 1 that should help the 20s, but we don’t expect it to be a game changer,” they added.
UBS pointed to the November clawback announcement when the US Treasury managed to stop the sell-off by saying auction sizes would not increase starting in May. However, this time there are no such strategies.
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The expected repurchase program will involve the issuance of more outstanding securities to facilitate the purchase of outstanding securities.
“Unlike central bank bond purchases, duration is not removed from the market,” UBS said.