Bond traders looking for something to jolt the $27 trillion Treasury market out of its recent rut will probably still be left waiting for answers, even after a busy week packed with a Federal Reserve meeting, the government’s quarterly debt-sale plans and a slew of economic data.
US 10-year notes have sagged so far this year and yields have steadily climbed. The declines in Treasuries have all but erased the advances made since last month, when Federal Reserve policymakers signaled an end to the latest cycle of monetary tightening. As investors anxiously await a new catalyst, they’ll likely only get more volatility in the days ahead rather than decisive signals that would have the potential to break bond yields out of their recent range.
That’s because the Fed isn’t expected to change its policy stance at this meeting. And with multiple monthly readings on inflation, consumption and jobs still to come before the March meeting, bond markets still won’t know the US central bank’s policy path after next week concludes.
Data released last week provided fresh evidence that the economy is humming along, giving the Fed more room to wait before pulling the trigger on rate cuts. Meanwhile, after the Treasury’s decision in November to slow the ramp-up of long-term bond sales helped fuel the bond rally, Wednesday’s so-called refunding announcementt is expected to be more routine.
Underscoring the wait-and-see sentiment, a JPMorgan & Chase survey showed the percentage of investors who are neutral on the bond market has increased to the highest since April.
“The bond market needs to be patient, just as the Fed has to be here,” said George Catrambone, head of fixed income at DWS Investment Management Americas. “Every data point matters and it will remain this way until the Fed starts the rate-cutting cycle.”
Despite cooling inflation, a string of stronger-than-expected economic data including retail sales has prompted traders to trim their expectations for the timing of rate cuts this year. After almost fully pricing in a reduction in March, traders now see such a move as a coin toss. In response, US 10-year yields have climbed more than a quarter of a percentage point since the end of December to 4.14%.
“I think June is where the market has gravitated to,” Bob Michele, chief investment officer for fixed income at J.P. Morgan Asset Management, said on Bloomberg Television Friday, referring to the month the Fed is likely to deliver the first rate cut. Michele’s outlook is for a “soft-landing” scenario, with 10-year Treasury yields eventually falling to as low as 3.25% as the Fed cuts rates and money piles into bonds.
Traders will have opportunities next week to assess both the bond-supply dynamic, the monetary-policy outlook and the latest status of the labor market.
No Surprises?
On Wednesday morning, the Treasury Department will unveil the size of bond auctions for the coming months. At the previous announcement in early November, when US 10-year yields traded near a 16-year high, Treasury Secretary Janet Yellen surprised the market by moderating the increase of longer-term bonds.
Strategists including those at Bank of America and Deutsche Bank expect the Treasury to be more predictable this time around. They estimate sales of coupon-bearing bonds will rise at a similar pace as the previous quarterly refunding, and this should mark the end of what will have been three straight rounds of increases.
“The supply increase is expected to have limited market impact,” said Bank of America’s strategists including Mark Cabana and Meghan Swiber wrote in a note. They added that the demand for Treasuries has improved since November, now that the Fed is done with rate hikes and inflation has cooled.
Next up on Wednesday, Fed Chair Jerome Powell and his colleagues are expected to keep benchmark borrowing costs at a range between 5.25% and 5.5%, while debating the timing and pace of rate cuts. They may also deliberate when to start slow down the pace of balance-sheet unwinding, a process known as quantitative tightening.
“The goal of the Fed is to say, ‘Hey, nothing is guaranteed. We’re going to get a lot more data between now and then,’” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “They need optionality.”
What Bloomberg’s Strategists Say ...
“If the Fed is to cut rates in March, a more dovish tilt than in recent comments will be required. We expect further discussion about balance-sheet runoff, and a formal announcement ending the Bank Term Funding Program.”
— Ira F. Jersey, rates strategist, and Will Hoffman, rates strategy associate
On Friday, Fed officials will get the payroll report for January, which is expected to show an uptick in the unemployment rate. Before the next monetary policy meeting on March 20, they will get one more job report and two more consumer price index figures. Fed Governor Christopher Waller has also flagged the scheduled CPI revisions due in early February as one key data to watch.
Bond traders are still penciling in a total of 1.34 percentage points of interest-rate cuts for this year. It’s equivalent to a little over five quarter-point reductions, two more than the median projection shown on the Fed’s dot plot at the December meeting.
For the Fed, recent upbeat data on the economy and inflation “are welcome numbers in general but the fear will be that if growth remains at, or above trend, the risk factors to inflation will remain,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “Powell will talk openly next week about rates coming down but we believe the approach will be cautious.”
Baylor Lancaster-Samuel, chief investment officer at Amerant Investments, said the market may be too aggressive in pricing in rate cuts, given the economy remains resilient. But the debate isn’t likely to settle any time soon. As a result, the market “will remain relatively range-bound for the foreseeable future,” she said.
What to Watch
- Economic data:
- Jan. 29: Dallas Fed manufacturing index
- Jan. 30: Housing price index; consumer confidence; job openings; Dallas Fed services index
- Jan. 31: MBA mortgage applications; ADP employment; employment cost index; Chicago PMI
- Feb. 1: Challenger job cuts; preliminary nonfarm productivity; unit labor costs; initial jobless claims; final reading of S&P Global manufacturing; construction spending; ISM manufacturing
- Fed. 2: Nonfarm payrolls; University of Michigan consumer surveys; factory orders; durable goods
- Fed calendar:
- Auction calendar:
- Jan. 29: 13-, 26-week bills
- Jan. 30: 42-day cash management bills
- Jan. 31: 17-week bills
- Feb. 1: 4-, 8-week bills
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Read more articles by Ye Xie, Michael Mackenzie
