Bond traders are facing a week that threatens to shatter any calm in the market

(Bloomberg) – It’s been a volatile period for the Treasury market – and next week is almost certainly no exception.

Most Read From Bloomberg

Traders in the world’s largest bond market are preparing for another round of price swings spurred by the Federal Reserve meeting, the Treasury’s quarterly debt sales announcement and continuing global economic uncertainty fueling big moves in the foreign exchange market.

The Federal Reserve is widely expected to raise its key interest rate by half a percentage point when it wraps up its two-day meeting on Wednesday, which marks the biggest upward move since 2000. But traders will closely watch Chairman Jerome Powell’s press conference for more clues. About just how far he thinks rates should go to curb inflation.

This will be followed by the Treasury’s announcement of its quarterly refund on the same day, which will spell out the scale of future bond auctions just as the Fed prepares to withdraw support from the market by not buying new securities when some of its holdings mature. On Friday, the Labor Department will release its monthly jobs report – an important market-moving gauge of a state’s economic growth and wage pressures that fuel inflation.

The confluence threatens to trigger a short period of stability that has crept into the bond market over the past week, the first since late February during which yields have not jumped to new highs. A bullish US dollar, which is tightening financial conditions and presenting headwinds to export growth, is adding a new variable to the already complex calculations of whether Treasury yields have risen enough to cover risk.

“There are a lot of unknowns that I think the market will remain volatile until we get a clearer picture of how the economy will continue while the Fed raises rates,” said Margaret Kerns, head of fixed income strategy at BMO Capital Markets. “The range of results is still too wide to rule out market volatility.”

By late Friday, US 2-year bond yields rose about 5 basis points over the week to 2.71%. The yield has risen for nine consecutive months, the longest stretch in Bloomberg data going back to 1976. Meanwhile, 10-year bond yields are hovering well below the 2.98% level reached on April 20, the highest reference rate since then. December 2018.

More volatility will add to the turbulent period for bondholders who are already facing one of the toughest markets in decades, with US Treasuries losing more than 8% so far this year, according to a Bloomberg Index. The index is setting on course for the worst year in history following a 2.3% drop in 2021. Bonds around the world have been dealt a psychological blow as central banks around the world seek to rein in inflation.

Read more: Global bonds set for worst month ever before interest rate hikes explode

“I don’t think core bond investors are out of the high inflation phase just yet,” said Jordan Jackson, global market analyst at JPMorgan Asset Management.

Many traders expect the Treasury on Wednesday to unveil a third but final quarterly round of cuts to long-term debt sales, expecting the Fed to set a date to start its quantitative tightening, or QT. Others think it’s possible for auction volumes to remain stable for this reason.

Extending the Fed’s debt, which will likely allow up to $95 billion of its debt holdings to mature each month without reinvesting the proceeds, will force the Treasury to borrow more from the public. That monthly maximum will be split between $60 billion in Treasuries and $35 billion in mortgage debt, according to the minutes of the Federal Reserve’s latest meeting.

Adding to the volatility, there is a battle between those who see increased risks from stagflation, or slower growth combined with flat inflation, and others who expect the Fed to quickly raise its policy rate beyond neutrality and lead to recession. A neutral rate is a level that neither restricts nor stimulates economic growth.

Economists at Deutsche Bank AG lead the companies that have retreated from the risks of a recession in 2023, and predict that the Fed may have to raise interest rates to 6% to quell four-decade high inflation. See Citigroup Inc. The Fed is raising interest rates by half a point at each of its next four meetings, but does not expect a recession in 2023, although it sees the risks of economic deflation increasing, according to Andrew Hollenhurst, the company’s chief US economist.

The record increase in staffing costs in the first quarter, released on Friday, prompted money market traders to increase the pace of pricing in 2022 to about 2.5 percentage points between now and the end of the year. The day before, recession fears were briefly weighed down by the news that the US economy shrank abruptly in the first quarter.

“I am baffled by the idea that the economy can handle sustained spikes beyond neutrals and QT,” said Priya Misra, global head of price strategy at TD Securities. “I think the 10-year yield has more room to go up as the QT flow kicks in. But there is no consensus on either view in the market. People think inflation may be flat and that won’t allow the Fed to slow down the tightening process, but I think the economy is not resilient. “.

what do you want to watch

Most Read Bloomberg Businessweek

© Bloomberg LP 2022

Leave a Comment