Chart of the day - TNOTE (19.10.2023)

Among the FOMC members, opinions regarding the next interest rate hike are now divided. From some bankers' comments, we learn that the current level is sufficiently high to bring inflation to target and cool down the economy - this is the view of, for example, Harker. On the other hand, the remaining bankers remain hawkish, signaling another rate hike at the December meeting. Waller made such comments yesterday.

In the market for 10-year US Treasury bonds, rising yields suggest that the market expects another interest rate hike. The decline in bond prices, and consequently, the increase in their yields, is surprising, especially in the context of rising geopolitical tensions between Israel and Hamas. Gold has risen over 7.0% since the onset of the war, justifying the capital flight to less risky assets. However, in the bond market, instead of price increases, we see deepening lows.

Such a situation may not last much longer. On the chart comparing the inverted price of 10-year bonds with the dollar index, we see a significant deviation. The dollar remains strong but does not justify such sharp drops in bond prices (inverted graph). We potentially have only one more interest rate hike in December. This would suggest that the downward movement for bond prices may already be limited.

On a weekly interval for the 10-year bond price quotations, we can notice that we are currently approaching very close to the lows reached just before the 2008 crisis. The index reached a level of 104.5 points then, which is only 1.0% lower than current levels.