Bond Bulls Energized as Global Risks Sow Doubts Over Fed's Path
(Bloomberg) -- Bond bulls have at least a couple things to be thankful for this holiday week: the geopolitical turmoil and global-growth concerns that could eventually lead the Federal Reserve to pause its policy tightening.
Tensions in Europe -- from wrangling over Italy’s budget to the fight over U.K. Prime Minister Theresa May’s Brexit deal -- are boosting the appeal of Treasuries as a haven. At the same time, top officials at the Fed are signaling greater focus on the risk of cooling growth outside the U.S., pushing traders to trim wagers on rate hikes next year. With only second-tier economic data slated for a week punctuated by Thanksgiving, this backdrop may persist.
The benchmark 10-year note yields 3.06 percent, down from a seven-year high of 3.26 percent set last month. Traders are now pricing in only about 35 basis points of Fed hikes next year. That’s down from over 50 basis points earlier this month, and is less than half of what the Fed itself projects. The dovish tilt in the rates market has some analysts looking for 10-year yields to test the bottom of their recent range, right above 3 percent.
“The market is now thinking global data is a real factor for the Fed and may cause a possible pause in their tightening,” said Ben Emons, chief economist at Intellectus Partners LLC. “There won’t be much scope for yields to rise,” said Emons, who sees 10-year yields sliding to 3 percent.
Continental European risks are poised to come to the fore again, with traders looking to Nov. 21. That’s when the European Commission may take its next step toward financial sanctions for Italy, with a possible rejection of the country’s budget for being in breach of European Union fiscal rules.
In the U.S., the coming week will provide insight on how the housing market is faring, amid signs that rate increases are restricting this segment of the economy.
Fed officials projected in September that they’d likely raise rates three times in 2019, after one more hike in 2018. Traders are increasingly skeptical of that pace. While markets had been pricing in just about two increases next year, even that degree of tightening has been brought into question.
“The likelihood that the Fed might at least temporarily slow the pace of its rate hikes from once a quarter to once every six months is increasing,” Krishna Guha, head of central bank strategy at Evercore ISI, wrote in a note Friday.
Technical indicators also signal that there’s room for yields to fall, according to Jon Hill, an interest-rate strategist at BMO Capital Markets.
“From a technical lens, momentum still suggests a continued rally has support,” he wrote in a note Friday. He cited as a near-term target “a range bottom of 3.055 percent before the 74-day moving average of 3.036 percent.”
What to Watch This Week
- While U.S. markets are closed on Nov. 22 for Thanksgiving, there are some U.S. economic data releases to watch in the week ahead:
- Nov. 19: NAHB housing index
- Nov. 20: Housing starts and building permits
- Nov. 21: MBA mortgage applications; durable goods; jobless claims; Bloomberg consumer comfort; leading index; existing home sales; University of Michigan sentiment
- Nov. 23: Markit manufacturing and services PMI
- The New York Fed’s John Williams has the stage to himself when it comes to scheduled remarks from U.S. central bankers. He will hold a Q&A in the Bronx on Nov. 19
- Here’s the schedule for Treasury auctions:
- Nov. 19: $42 billion of three-month bills; $36 billion of six-month bills
- Nov. 20: Four- and eight-week bills
- Nov. 21: $11 billion 10-year TIPS reopening
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