Bond Traders Agree on One Thing: Fed Cuts, Wild Swings Are Ahead

(Bloomberg) --

Investors are counting on a steep Federal Reserve rate cut this week as policy makers move to support the economy in the face of the coronavirus pandemic. But what there is much less certainty about is where Treasury yields head next.

The world’s biggest government-debt market is coming off one of its wildest stretches ever, featuring a dive to record low yields and the widest weekly range in 30-year rates in the past two decades. The turbulence was so severe that some sectors of the market were hard to trade in.

After the Fed last week pledged trillions of dollars of liquidity and the Trump administration moved to facilitate more federal aid for states and municipalities, investors will turn their focus to the central bank’s March 18 decision. Futures traders align with most economists in predicting it will slash rates by a percentage point. But the reaction in Treasury yields -- a benchmark for global borrowing costs -- is anyone’s guess.

“I don’t think anybody can say what the next move in yields is going to be,” said Tad Rivelle, chief investment officer for fixed income at asset manager TCW Group Inc. “The Fed, however, is going to do its darndest to take them down and will take out another bazooka to do it.”

The 10- and 30-year yields enter the week at 0.96% and 1.53%, respectively. Both ended last week higher after collapsing to record lows, and the long bond swung by more than 100 basis points. The globe’s flight into haven assets has delivered Treasury investors a return of about 6.8% return in 2020 through March 12, almost matching its gain of last year, which was the best since 2011.

Economic data ahead may fail to draw much attention from investors. More likely they’ll be monitoring the nation’s attempts to come to grips with the virus.

Even with the Fed’s support, widespread business closures, canceled events and the threat of corporate bankruptcies mean the U.S. is headed toward recessionary-type conditions, Rivelle said.

The Fed may follow its massive injection of cash and a likely rate cut this week with other steps to shore up financial markets, said Alex Li, head of U.S. rates strategy at Credit Agricole SA in New York. He expects continued turbulence in yields because of diminished liquidity and unwinding of “bad positions.”

The Fed has other tools it can turn to beyond quantitative easing, even as early as this week, include expanding the amount of money it provides international central banks through swap lines, scaling back regulations on banks and special loans to non-bank borrowers, Li said.

Fed’s Repo Move Offers Peek at Playbook to Ease Liquidity Needs

Tony Rodriguez, head of fixed-income strategy at Nuveen, says the Fed will get rates down to zero, though maybe not at this meeting, and he also sees heightened price swings continuing.

The two-year yield, at 0.49%, will range between zero and 25 basis points, while the 10-year floats between 40 and 100 basis points in coming months, Rodriguez predicted.

Nobody can gauge the path of the virus “and that uncertainty, by definition, will lead to volatility,” Rodriguez said. “We are at the higher end of the range for 10-year note yields. But overall, we expect to see continued volatility in yields and in other assets, including equities.”

What to Watch

• Here are the highlights on the economic calendar:
  • March 16: Empire manufacturing; Treasury International Capital flows data
  • March 17: Retail sales; industrial production; business inventories; JOLTS job openings; NAHB housing
  • March 18: MBA mortgage applications; building permits; housing starts
  • March 19: Current account balance; Philadelphia Fed business outlook; jobless claims; Bloomberg economic expectations; Bloomberg consumer comfort; leading index
  • March 20: Existing home sales
• And the Treasury’s auction calendar:
  • March 16: 13- and 26-week bills
  • March 19: 4-, 8-week bills; 10-year TIPS reopening

--With assistance from Elizabeth Stanton.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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