Home Fixed interest The spike in bond yields that seemed close disappeared from view

The spike in bond yields that seemed close disappeared from view

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(Bloomberg) – All bets appear to be off on how high yields can rise in the world’s biggest bond market.

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With only the two-year hitting a new multi-year high this week – on Friday after October labor market data came in stronger than expected – more bloodshed in the Treasury market looks inevitable.

Federal Reserve Chairman Jerome Powell reiterated on Wednesday, after the central bank’s sixth rate hike this year, to a range of 3.75% to 4%, that there is no end in sight as long as inflation remains high. Swap traders reacted by setting prices at a peak rate above 5%.

“The data has to be very bad to move the Fed from its current path,” said George Goncalves, head of US macro strategy at MUFG. Thus, “the risk/reward profile and bias of the bond market has turned into an additional profile of weakness.”

For now, investors remain convinced that the Fed is on a path that will eventually bring the economy to its knees. This can be seen in the difference between the yields of two-year and longer-dated Treasury bills.

The two-year yield topped the 10-year Treasury yield by 62 basis points this week, the deepest reversal since the early 1980s, when then-Fed Chairman Paul Volcker was rising tireless rates to contain hyperinflation. Curve reversals have a 12-18 month history of previous economic downturns.

The inversion has the potential to rise as much as 100 basis points if the market begins setting a terminal rate of 5.5% in response to future inflation readings, said Ira Jersey, chief rate strategist at interest at Bloomberg Intelligence.

The two-year peaked this week at nearly 4.80%, while the 10-year is yet to top 4.34% in the current cycle, and ended the week at 4.16%.

All returns are expected to exceed 5% as the Fed continues to tighten financial conditions, said Ben Emons, global macro strategist at Medley Global Advisors.

“Now it’s about the ultimate destination” for the policy rate, said Michael Gapen, head of U.S. economics at Bank of America Corp., whose forecast for the terminal level is in a range of 5% to 5.25%. “The risk is that they ultimately have to do more than we all think and it takes longer to get inflation under control.”

Money market traders remain divided on whether the upcoming Fed meeting in December will result in a fifth straight three-quarter point rate hike or a smaller move of half a point. Powell repeated this week that the pace of increases should slow down at some point, possibly as early as December. But with October and November inflation data due out in the meantime, it’s too early to tell.

October consumer prices should post a deceleration on Thursday. The 6.6% year-on-year rise in non-food and energy prices in September was the largest since 1982, and it pushed the expected peak in the Fed’s key rate above 5% for the first time.

Inflation data is set to dominate a holiday-shortened week in which there could be upward pressure on yields as Treasury debt sales resume, including new issues at 10. and 30 years old. The auction, which also includes a new 3-year note, is the first in a year not to have been reduced from the most recent comparables.

The Bloomberg US Treasury Index has lost almost 15% this year. With stocks also beaten in 2022, investors in the popular 60/40 split between stocks and high-quality bonds have lost about 20%, according to a Bloomberg index.

Hope is eternal though. TD Securities strategists recommended Friday to start buying 10-year Treasuries, expecting yields to fall as consumers deplete savings and rein in spending, while the Fed holds the rate raised.

“We are bullish on fixed income,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments. “There has been a significant reset for the asset class, especially if yields can sustain higher. Lots of tightening factored in.

What to watch

  • Economic Calendar

    • November 8: NFIB Small Business Optimism

    • Nov. 9: MBA mortgage applications; wholesale inventory

    • November 10: IPC; weekly jobless claims

    • November 11: University of Michigan sentiment and inflation expectations

  • Fed calendar:

    • November 7: Boston Fed President Susan Collins; Cleveland Fed President Loretta Mester; Thomas Barkin, Richmond Fed President

    • November 9: New York Fed President John Williams; Barkins

    • November 10: Fed Governor Christopher Waller; Dallas Fed President Lorie Logan; Master ; Kansas City Fed President Esther George

  • Auction schedule:

    • November 7: 13 and 26 week invoices

    • November 8: 3-year tickets

    • November 9: 10-year bonds; 17 week invoices

    • November 10: 30-year bonds; 4, 8 week invoices

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