Bond Traders Clamoring for Answers Bet the Fed Isn’t Done Yet

(Bloomberg) -- The world’s biggest bond market enters a potentially pivotal week with Treasuries regaining momentum as investors brace for signals from the Federal Reserve on its next crucial policy move.

Ten-year Treasury yields are coming off their biggest weekly drop since early June. Traders are betting the Fed isn’t done with stimulus even as last week’s release of the minutes from the Fed’s July meeting raised questions over the timing of any additional support for the economy.

While lawmakers are still struggling to agree on further relief measures, the focus will turn to Thursday’s speech by Fed Chairman Jerome Powell at the Kansas City Fed’s annual symposium. He’ll discuss the central bank’s long-awaited policy framework review, which is widely expected to lay the groundwork for a new inflation strategy. Traders are also looking for any hints on plans for the Fed’s bond-buying program. The upshot is that the days ahead could prove critical for interest rates, the economy and inflation.

“The fact that Powell is going to be speaking at Jackson Hole on the change in the Fed’s framework is really going to make it a potentially tradeable event,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

The benchmark 10-year Treasury yield fell 8 basis points last week to about 0.63%, just a bit more than 30 basis points above its record low from March.

The rally trimmed only some of the losses of the prior week, when investors had to absorb a record $112 billion refunding. The days ahead bring another hefty slate of auctions that could revive the bearish tone: The Treasury will sell a combined $148 billion of 2-, 5- and 7-year notes.

But the highlight of the week looks to be the Fed’s gathering Thursday and Friday, to be held virtually and live-streamed to the public. For BMO’s Lyngen, there’s scope for lower yields in the wake of the event, as it may make clear that Fed policy will remain accommodative for years to come.

“The notion of a framework shift would be dovish, locking in the low-rate environment,” he said.

Fed officials spent 2019 and this year finishing up their first-ever review of how they pursue their dual goals of maximum employment and price stability. Predictions center on the view that the Fed may allow for a more relaxed view on inflation that would alter the schema it’s used since 2012 to target 2% inflation.

Fed Close to Making Its New Inflation Strategy Official

Real yields -- which strip out the effects of inflation -- have been spiraling lower amid a jump in inflation expectations as investors wagered such an adjustment would boost price pressures. Ten-year real rates are about minus 1%, not far from a record low, and similar-maturity breakeven inflation rates are at 1.64%, close to the highest in months.

Demand for Treasuries has been able to withstand the swell of supply as U.S. yields still outstrip most developed-nation peers and given the Fed’s purchases. It’s buying about $80 billion of Treasuries a month to support market functioning.

“The supply is tremendous, but the Fed is still buying every day for the most part,” said Glen Capelo, head of rates trading at Mischler Financial. “And real accounts are still buyers of the long-end because there’s no alternative if you want yield.”

What to Watch

• The economic data calendar:
  • Aug. 24: Chicago Fed national activity index
  • Aug. 25: House price purchase index; FHFA house price index; S&P CoreLogic home price data; Conference Board consumer confidence; new home sales; Richmond Fed manufacturing
  • Aug. 26: MBA mortgage applications; durable, capital goods orders
  • Aug. 27: Gross domestic product; weekly jobless claims; Bloomberg consumer comfort; pending home sales; Kansas City Fed manufacturing
  • Aug. 28: Personal income/spending; advance goods trade balance; wholesale/retail inventories; PCE deflator; MNI Chicago PMI; University of Michigan sentiment
• The Fed calendar:
  • Aug. 25: San Francisco Fed President Mary Daly in panel on inequity and Covid-19
  • Aug. 27-28: Kansas City Fed annual policy symposium
    • The theme is “Navigating the Decade Ahead: Implications for Monetary Policy”
    • Aug. 27: Powell speech
• The auction calendar:
  • Aug. 24: $54 billion 13-week bills; $51 billion 26-week bills
  • Aug. 25: $50 billion 2-year notes; $30 billion 42-day cash-management bill; $30 billion 119-day CMB
  • Aug. 26: $22 billion 2-year floating-rate note reopening; $51 billion 5-year notes
  • Aug. 27: $47 billion 7-year notes; 4-, 8-week bills

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