(Bloomberg) -- The rally that swept through the Treasury market in August is the strongest since the depths of the 2008 crisis. This insatiable demand for the safety of bonds faces a reality check in the days ahead.
A roster of events may provide insight into the strength of the U.S. economy and the Federal Reserve chief’s thoughts. On Friday, the monthly payrolls report is expected to show continued labor market strength. Later that day, Jerome Powell is set to speak for the last time before the Fed’s quiet period leading up to policy makers’ next decision on rates.
And don’t forget about the U.S.-China trade war. A new slate of tariffs on Chinese imports took effect Sunday.
“There’s a lot of data to look out for, including payrolls, with people also coming back from summer holidays so activity should pick up quite a bit,” said Alex Li, head of U.S. rates strategy at Credit Agricole SA in New York. “Powell’s speech will be closely monitored for any hints on monetary policy in September and thereafter. And U.S.-China trade talks will also remain on the front burner for traders.”
The stakes are high with yields plumbing record lows and the Bloomberg Barclays U.S. Treasury index showing government bonds notching their best monthly return since 2008. Donald Trump’s tweets and off-the-cuff remarks on the dispute with China have been a major catalyst behind the rally. So was disappointment over the Fed’s July 31 rate decision. Hedging was another factor.
Whatever the cause, investors are so desperate to own Treasuries that a measure of momentum shows 10-year bonds are the most overbought in years, according to Bloomberg Intelligence. U.S. 30-year yields fell to an all-time low of 1.90% on Aug. 28, while 10-year rates have dropped five straight weeks.
The Fed will cut rates a quarter point in September and again sometime in the fourth quarter, and then ease further in 2020, predicted Li, who expects the 10-year Treasury yield to end 2019 at 1.45%. It sank below that level repeatedly in recent days.
Fed funds futures indicate just over a quarter point of easing priced in by the end of September and more than a half-point cut by the end of the year.
At play in market gyrations and expectations for monetary policy has been an acute focus on the U.S.-China trade war, with the outlook often changing on a dime. One day, a tweet from Trump may send stocks reeling and bonds surging, only for a more conciliatory tone from either side to drive up risk assets the next day. But while U.S. stocks just notched their first weekly gain since July, demand for the safety of fixed income persisted, as investors continue to assess the outlook for inflation and the U.S. consumer.
The data has been murky, at best. Measures Friday confirmed U.S. consumers continue to spend, but confidence metrics fell the most since 2012. The Fed’s preferred measure of price pressures remains solidly below its 2% target. At the same time, U.S. real rates, gauged by the yield on 10-year Treasury Inflation-Protected Securities, have turned negative for the first time in three years.
It’s likely yields will stay close to current levels, according to Christopher Sullivan, chief investment officer at United Nations Federal Credit Union.
“Many people are expecting a reversal in yields because it’s been such a powerful rally,” said Sullivan. “But there’s this insatiable demand for safe yield, particularly for positive-yielding debt like Treasuries. And it’s likely that central banks will continue to be accommodative, with the Fed probably cutting again in September.”
What to Watch
- U.S. markets are shut Monday for Labor Day
- Here’s the U.S. economic calendar
- Sept. 3: Markit manufacturing PMI; ISM manufacturing/employment/prices paid/new orders; construction spending
- Sept. 4: MBA mortgage applications; trade balance; Fed Beige Book; Wards vehicle sales
- Sept. 5: Challenger job cuts; ADP employment; non-farm productivity and unit labor costs; jobless claims; Bloomberg consumer comfort; Markit services/composite PMI; factory orders; durable goods; ISM non-manufacturing
- Sept. 6: monthly payroll report
- Fed speakers are plentiful, including the chairman
- Sept. 3: Boston Fed’s Eric Rosengren
- Sept. 4: New York Fed’s John Williams, Fed Governor Michelle Bowman, St. Louis Fed’s James Bullard, Minneapolis Fed’s Neel Kashkari and Chicago Fed’s Charles Evans
- Sept. 6: Chairman Jerome Powell on economic outlook and monetary policy
- Treasury only has bills up for auction
- Sept. 3: $45 billion of 3-month bills; $42 billion of 6-month bills
- Sept. 5: 4- and 8-week bills
©2019 Bloomberg L.P.
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