Investor risk appetite softens
Investors have turned cautious as a December rate cut by the Federal Reserve now seems less certain.
The yield on 10-year US Treasuries is now 4.13%, back within its recent trading range of 4.00% to 4.20% seen since March. In October, it was yielding below its 4% mark, as investors expected the Federal Reserve (Fed) to cut rates. This narrative has changed and so has investor appetite for risk.
The minutes of the Federal Open Market Committee meeting held in late October were released this week. The minutes revealed that Fed officials were on the hawkish side, meaning they are less eager to cut rates to keep inflation under control. They also showed divisions within the Fed on the future course of monetary policy. Many members were leaning towards a hold in December, while a few members were in favour of continuing to cut rates. Markets still expect the Fed to lower rates further, but a December cut now seems less likely. This shift has made investors more cautious.
Higher yields on the longer-term Treasuries made it easier to find stable demand for duration (interest rate sensitivity) during the November US Treasury auctions1 so far. With the recent government shutdown temporarily lifted until January, investors are watching upcoming economic data closely. In particular, they are looking for clues about the health of the US labour market and the broader economy.
Central banks are expected to keep rates lower than usual over the next few years, especially in the US. However, concerns about inflation and rising government debt are growing. These worries could lead to higher risk premium (the extra return investors demand for taking on higher risk) for longer-term bonds. Investors should be aware of these risks when looking to add credit risk to their portfolio.