Hawkish comments at press conference could trigger selling
by Ruth Carson, Michael MacKenzie and David Finnerty
Volatility in the world’s largest bond market has collapsed in recent weeks, but Federal Reserve Chair Jerome Powell’s upcoming press conference may change the picture.
Traders are looking to Powell’s remarks to determine their next move at a time when US policymakers have grown increasingly divided on the outlook for interest rates. A softening labor market is bolstering the case for easing, although that’s being complicated by data showing that a core measure of inflation remains well above target.
Swaps pricing indicates that investors have fully priced in a quarter-point rate reduction at the Fed decision on Wednesday, and around three more cuts by July. But Powell’s comments may alter the equation, which could set the stage for Treasuries to snap out of their inertia.
Any hawkish commentary from the Fed chair is likely to trigger a new round of selling, catapulting 10-year yields above 4% and raising borrowing costs in the world’s biggest economy. The benchmark traded little changed at 3.98% at 4:35 a.m. in New York, while those on policy-sensitive two-year notes held at 3.49%.
“There’s a lot priced in for the Fed for the next 14 months and if there is any blip that can probably back up yields 25 to 30 basis points,” said Scott DiMaggio, head of fixed income at AllianceBernstein. “The charts say 4.25% on the 10-year.”
Yields on Treasuries have largely been stuck in a range in recent days amid a data vacuum resulting from the US government shutdown. The ICE BofA Move Index, a gauge of Treasury volatility, is hovering near levels last seen during the pandemic.
“Caution is warranted for Treasuries trading,” said David Chao, global market strategist at Invesco Asset Management. “The labor market has softened, which warrants a bit of a loosening of monetary policy, but I don’t think that we’re on a trajectory where rate cuts are guaranteed.”
What Bloomberg Strategists Say...
The Treasury market may be setting itself up for disappointment if Fed Chair Jerome Powell resists validating the market’s aggressive rate-cut timeline on Wednesday.
Brendan Fagan, FX Strategist
In contrast, some see potential for Treasuries to outperform heading into the year-end.
It’s a view based on the thesis that benchmark yields remain attractive at around 4%, with the US’ trade war likely to dent risk sentiment and fuel demand for havens. Further Fed rate cuts would also boost demand for Treasuries.
“Our view is that we are going to have growth probably picking up a little bit as we go into next year — so that may bring a little bit more nervousness,” said Neil Sutherland, portfolio manager at Schroder Investment Management. But for this year, with the Fed’s rate cuts in play, “we still think the point of least resistance is lower rather than higher yields.”
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