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Financial Bulletin

Re-pricing interest rate cut expectations! Investors abandoned short-term US debt and poured into medium-term US debt ETFs.

Release Time:2024-02-27

As the expectation of interest rate cuts cooled down, investors withdrew from short-term debt and poured into medium-term US debt ETFs.

The pioneer medium-term US debt ETF(VGIT), which tracks medium-term bonds (maturing in the next 3-10 years), absorbed 1.7 billion US dollars last week, setting the largest inflow of funds since its establishment in 2009.

In addition, last week, Schwab's short-term U.S. debt ETF outflow was $508 million, Pioneer's short-term U.S. debt ETF outflow was $397 million, and Ishares' 20+-year U.S. debt ETF outflow was about $284 million.

Why did this turn occur?

In January, CPI and PPI data rebounded more than expected, while GDP data showed that the US economy was still resilient, pushing up the yield of 10-year US bonds to a high point in the year last week.

Therefore, traders' demand for medium-term bonds begins to increase, because medium-term bonds face less interest rate risk than long-term bonds and have higher coupon than short-term bonds.

Lindsay Rosner, head of multi-sector fixed income investment at Goldman Sachs Asset Management, said:

"The middle part of the yield curve began to become more interesting, partly because the interest rate complex responded to the decline in the possibility of the Fed cutting interest rates faster."

"In addition, the large fluctuation of ETF may be related to the rebalancing of asset allocation."

At present, traders expect the Fed to cut interest rates three times this year, each time by about 25 basis points, which is about half of what was expected at the end of 2023.

Goldman Sachs has lowered its interest rate cut forecast twice in a row this month, postponing the Fed's expectation of the first interest rate cut from May to June, and lowering its expectation of the number of interest rate cuts during the year from five to four.

Federal Reserve officials were also "hawking" intensively last week, and Federal Reserve Governor Waller said that more evidence of falling inflation was needed to support interest rate cuts.

Risk warning and exemption clause

The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.

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