In October, US Treasuries staged a clear rebound, with the 10-year yield falling from a previous high of around 5.36% to near 4.95%. The Federal Reserve's decision to hold rates steady this time did not interrupt this move.
However, to judge how far the rebound can go, it is necessary to first distinguish why yields fell and whether those drivers are still in place.
In mid-October, concerns about AI-related financing disrupted the credit market, credit spreads widened, and US Treasuries gained safe-haven demand. During the same period, technical indicators showed that some shorts exited and crowding in CTA positioning declined. Therefore, this rally was driven both by a decline in risk appetite and by position adjustments, and it cannot be entirely interpreted as the market lowering its growth and inflation expectations. Short covering can explain part of the gain, but without continuous positioning data, it is still too early to conclude that buying power has been exhausted.
The credit market has shown some changes. Previously, the correlation between spread changes across different credit bonds rose, and volatility became more synchronized; recently, acute pressure has eased somewhat, but financing concerns have not disappeared. If pressure expands again, safe-haven demand could still push US Treasuries higher, without waiting for investment and employment data to actually weaken. Conversely, if the credit market continues to stabilize, the case for this part of demand to strengthen further will diminish.
On the policy side, there is temporarily not much new positive news. The Federal Reserve upgraded its description of growth from "solid" to "strong," while still viewing inflation as elevated. After the meeting, the pricing for a December rate hike fell from 23bp to about 21bp, a limited adjustment. This at least shows that the market did not significantly withdraw its expectations for the next rate hike because of this hold. The economy remains resilient and inflation remains elevated, which also makes it difficult for the Federal Reserve to clearly signal the end of tightening.
Another recent variable is the November quarterly refunding arrangement. There has already been discussion in the market about reducing long-end issuance, but it has not yet been implemented. If the actual arrangement is smaller than expected, long bonds could still receive supply-side support; however, since a reduction has already been discussed, how much of a rally it can ultimately drive depends on how much the announced result exceeds expectations, rather than merely on whether issuance declines.
This means that even if economic data do not weaken, US Treasuries are not without opportunities to continue rebounding. Overall, the author is more inclined to expect the rebound to slow and the market to shift into range-bound trading. Credit pressure has eased somewhat, but December rate hike expectations have largely been retained, and the available information is still not enough to support a sustained rapid decline in yields.
Next, if long-end supply is lower than expected, the rebound still has room to continue; if the refunding arrangement brings no surprise and the credit market continues to stabilize, the possibility of yields rising will increase. Compared with continuing to trade a pause that has already occurred, the next changes in supply arrangements and credit risk are more worth watching.
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