Bonds Sell Off as Traders Reprice Fed Rate Cuts: Markets Wrap

The bond market experienced a significant sell-off recently, as traders repriced their expectations for Federal Reserve (Fed) rate cuts. This shift in sentiment was driven by robust US retail sales data, which illustrated resilient consumer spending and reinforced the view that the US economy is far from a recession. The strong economic indicators led traders to reduce their bets on Fed rate cuts, sending Treasury yields higher and strengthening the US dollar.

The weakening yen played a crucial role in supporting Japanese equity futures and the overall market dynamics. The yen passed the psychological level of 150 per dollar, bringing back the risk of intervention by Japan. This currency movement, coupled with robust US retail sales data, contributed to a mixed open for Asian markets on Friday.

The shift in Fed rate cut expectations had a profound impact on the US dollar and Treasury yields. The Bloomberg Dollar Spot Index rose 0.1%, while Treasury yields climbed, pushing an index of dollar strength higher for a fourth day to the highest level since early August. Australian and New Zealand yields also climbed in early Friday trading, tracking the moves.

The selloff in Treasuries left equities mixed, as new signs of economic vigor led traders to trim expectations for US rate cuts. The S&P 500 ended the day little changed after early gains that pushed the index to an all-time high fizzled out. Swaps traders further reduced bets on Fed rate cuts in the remaining two meetings of the year.

The change in rate cut expectations affected the performance of US equities, particularly the S&P 500. The index ended the day little changed, reflecting the mixed sentiment in the market. The strengthening dollar and rising Treasury yields influenced emerging market currencies and bonds, as investors grappled with the implications of higher interest rates on their portfolios.

The robust US retail sales data also influenced investor sentiment towards US equities and the broader economy. The data followed a blowout jobs report and a hotter-than-estimated consumer inflation print released earlier in the month, further reinforcing the view that the US economy is strong and resilient. This positive sentiment contributed to the mixed performance of the S&P 500 and other major equity indices.

In conclusion, the recent bond market sell-off was driven by traders repricing their expectations for Fed rate cuts, following robust US retail sales data. The weakening yen and the shift in rate cut expectations had a significant impact on the US dollar, Treasury yields, and emerging market currencies and bonds. The mixed performance of US equities reflected the mixed sentiment in the market, as investors grappled with the implications of higher interest rates and strong economic data.