Bloomberg

Bond traders in limbo on track to yields with declining volatility

(Bloomberg) – T-bill volatility expectations, at least one measure, are about as low as they have been in months, showing the jury is still out on on the next stage of yields on the world’s largest bond market. US government debt is rebounding slightly this quarter, after a rout in the first three months of the year that resulted in the worst losses since 1980. Yields are now stuck in a range, with traders still bewildered by some key economic questions: whether the rebound of the pandemic will prove to be lasting and whether the rise in inflationary pressures will be temporary, as the Federal Reserve maintains. early June with the publication of monthly job data. The new catch is particularly important given the Fed’s focus on the job market and, after the previous report, was much weaker than expected, leaving traders in limbo. The ICE BofA MOVE index, which tracks implicit fluctuations in Treasury bill prices over the next month, is at its lowest since February. Last week’s 10-year rate range of just under 9 basis points was the narrowest since January. This month, the rate hit as low as 1.46% on unexpectedly weak labor data, and peaked at 1.7% following a surge in consumer prices. trajectory of the economy, ”said Rajappa, head of US interest rate strategy at SocGen. “On the inflation front, most customers already expect high inflation impressions to persist for the rest of the year.” This week, weak demand at an inflation-protected 10-year Treasury bill auction suggested confidence in the Fed’s rhetoric that accelerating consumption But data on the work will be critical going forward, as the central bank has indicated it is focusing on testing the outer limits of full employment, calling it a broad and inclusive goal, while allowing inflation to exceed 2%. target. It will therefore be essential for traders to assess the progress made in recovering the jobs lost due to the pandemic. Traders are betting the economy will be strong enough for the Fed to start raising borrowing costs. in early 2023. Policy makers, meanwhile, project rates will still be close to zero at least until the end of this year. The Fed has said the process of removing accommodations will begin with cutting its bond buying program. The prospect of such a pullback on Wednesday triggered a temporary rise in yields after minutes from the April policy meeting showed some officials were prepared to discuss the cut at “next meetings.” In the coming week, Gov. Lael Brainard and Atlanta Fed Chairman Raphael Bostic are ultimately both Rajappa and Faranello to end the year with 10-year yields above current levels of around. 1.6%. Rajappa forecasts 2% at the end of the year. Faranello sees a bit more leeway, but expects buyers to limit the climb. The pressure for higher global yields could come from Europe. Improved vaccine roll-out and bets on an economic return have pushed German 10-year yields up to the point that some investors are warning of breaking above zero for the first time in more than two years. Note. A consumer price measure known as the Personal Consumer Expenditure Price Index, which the Fed is officially targeting, is expected to jump 3.5% in April, the highest in more than a decade. And the measure of inflation expectations for the next 5-10 years based on a University of Michigan survey is on the radar after a preliminary reading that reached its highest level since 2011. “Let these inflationary pressures be transient or not, nobody really knows, ”Faranello mentioned. “But the Fed wants to get people back to work, and that’s a big challenge given the bottlenecks between job postings and people who don’t come back for a myriad of different reasons. The market therefore needs more clarity on the employment situation. A look aheadEconomic Calendar May 24: Chicago Fed National Activity Index May 25: FHFA House Price Index; S&P CoreLogic house prices; sales of new homes; Conference Board Consumer Confidence; Richmond Fed Manufacturing Index May 26: MBA mortgage applications May 27: durable goods / capital goods orders; GDP; applications for unemployment benefits; Consumer comfort Langer; pending home sales; Kansas City Fed manufacturing activity May 28: increase in the goods trade balance; wholesale / retail inventories; personal income / expenses; PCE deflator; MNI Chicago PMI; The sentiment of the University of Michigan The Fed calendar: May 24: Fed Governor Lael Brainard; Loretta Mester of Cleveland Fed; Raphael Bostic of the Atlanta Fed; Esther George of the Kansas City Fed May 25: Charles Evans of the Chicago Fed; Thomas Barkin of the Richmond Fed; Vice President for Supervision Randal Quarles May 26: Quarles in two appearances Auction schedule: May 24: 13, 26 week bills May 25: 42 day cash management bills; 2-year notes May 26: 2-year variable rate notes; 5 year tickets May 27: 4, 8 week bills; Subscribe now to stay ahead with the most trusted source of business information. © 2021 Bloomberg LP