TNote: the 10-year rate returns to an attractive price level

The return/risk couple seems to be becoming attractive again on the 10-year TNote after a fall over the last three months.

The 10-year TNote goes from one extreme to another in three months

Bond rates have recovered significantly since mid-September after the Fed’s rate cut. This upward reaction in rates, counterintuitive at first glance, can be explained by a clear improvement in the economic outlook in the United States.

Not only did the Fed lower its rates more than expected (50 versus 25 basis points), but economic data have clearly improved compared to early August as evidenced by the recovery in the Citigroup economic surprise index. The unemployment rate fell back to 4.1%, after having climbed to 4.3%, while the inflation figures came out slightly above expectations, with core PCE inflation even rebounding by 0.1 point to 2.7% for two months.

Faced with this better-than-expected economic data and the resilience of inflation, speculators drastically revised downwards their expectations of a Fed rate cut, which naturally caused bond rates to rebound.

The narrative even seems to have reversed, with fears that the Fed’s 2% inflation target will be unattainable in the near future and that Donald Trump’s victory will allow an acceleration in nominal growth. This thesis is far from a certainty, because some of its measures are deflationary and some so-called inflationary, such as tariffs, are not necessarily so. Indeed, an increase in customs duties is neither more nor less than an increase in taxes on consumers (such as VAT), which reduces purchasing power and therefore the total volume of consumption.

10-year TNote daily price chart – key levels

The return/risk couple becomes positive again on the TNote

From a technical analysis perspective, the 10-year TNote price is returning close to a significant bullish slant line through the lows of October 2023 and spring of this year. The return/risk couple becomes again in favor of purchases as this threshold approaches, especially after such a fall since mid-September (+80 basis points of the 10-year rate).

The 10-year TNote could soon attempt a rebound to at least its 200-session moving average at around $111, especially if the next employment figures disappoint, as the likelihood of another Fed rate cut in December is “only” 60%.