Bond-market rally may not be over after inflation report brings 'massive relief'

By Christine Idzelis

'If you think about the Fed now, they clearly have a dovish bias,' says Vanguard's John Madziyire

The U.S. bond market broadly rose on Wednesday, paring its losses this year after fresh inflation data added fuel to investor hopes that the Federal Reserve may cut interest rates in 2024.

Shares of the Vanguard Total Bond Market ETF BND, which tracks U.S. investment-grade fixed-income securities, gained 0.6% on Wednesday, according to FactSet data. The rise reduced the fund's loss so far this year to 0.8% on a total-return basis.

Given the "hypersensitivity" to inflation in the bond market lately, Wednesday's reading from the consumer-price index provided "massive relief" to markets that inflation is still on a downward trajectory, said John Madziyire, senior portfolio manager and head of U.S. Treasuries and TIPS at Vanguard, in a phone interview.

U.S. inflation, as measured by the consumer-price index, rose 0.3% in April for a year-over-year rate of 3.4%, according to a report Wednesday from the Bureau of Labor Statistics. The pace of inflation slowed over the past 12 months from an annual pace of 3.5% in March, after a softer-than-expected increase in April.

Although core inflation remains high, investors are breathing a sigh of relief that it's coming down, said Madziyire.

Core inflation, which excludes food and energy prices, rose 0.3% in April - as Wall Street expected - with the annual rate decelerating to 3.6% last month from 3.8% in March.

"If you think about the Fed now, they clearly have a dovish bias," said Madziyire, with the federal-funds futures market reflecting that.

The market is expecting rate cuts by the Fed this year, with the latest inflation data as well as Wednesday's U.S. retail-sales report supporting that thinking, he noted.

U.S. retail sales were flat in April after seeing a strong rise in March, with the April report taking some heat off inflation pressures in the economy, according to Madziyire.

Traders in the fed-funds futures market anticipate that the Fed could begin lowering its benchmark rate as soon as September, according to the CME FedWatch Tool on Wednesday.

Meanwhile, the yield on the 10-year Treasury note BX:TMUBMUSD10Y dropped 9 basis points on Wednesday to 4.354%, according to Dow Jones Market Data. That's the lowest yield since April 4, based on 3 p.m. Eastern time levels.

Madziyire said he expects the 10-year Treasury yield could fall further this year to around 4.25%, the low end of a trading range that he pegged at 4.75% on the high end.

As bond yields and prices move in opposite directions, that leaves some room for the 10-year Treasury note to still rally this year, in his view.

"I wouldn't say today's rally is it," said Madziyire. "These yield levels are very attractive on a historical basis."

All three major U.S. stock indexes closed at record highs Wednesday in the wake of the inflation report. The Dow Jones Industrial Average DJIA finished 0.9% higher, while the S&P 500 SPX climbed a sharp 1.2% and the Nasdaq Composite COMP gained 1.4%.

-Christine Idzelis

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05-15-24 1732ET

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