Battered Bond Traders Brace for Whiplash From U.S. Payrolls
(Bloomberg) -- The increasingly influential expectations gap between bond traders and central bankers faces a fresh test Friday -- U.S. jobs data that could reignite or damp out the inflation concerns policy makers tried to downplay this week.
The Bank of England’s surprise decision to hold interest rates on Thursday capped three days of determined dovishness from major central banks, putting many of the more aggressive bets on global rate hikes under pressure. Short-end yields have swung wildly in many markets, surging in October before collapsing in the first week of November, and the Treasuries curve has flipped from flattening to steepening.
Federal Reserve Chair Jerome Powell said he won’t entertain interest-rate increases until the labor market heals further, intensifying the scrutiny on all employment data. A Labor Department report Friday is forecast to show the U.S. added 450,000 workers to payrolls in October, the most since July, at a time when wages are surging and employment costs rising at the fastest pace on record.
Surprises with the jobs report, or indeed next week’s CPI data, could drive fresh waves of bond volatility.
“Powell’s comments on Wednesday will again be questioned if the payrolls report prints much more strongly than anticipated,” said Sean Keane, managing director of Triple T Consulting Ltd. In the short-term bond market “the size of the recent moves and their inconvenient timing so late in the calendar year makes them far more challenging in terms of position and profit-and-loss management.”
The whiplash in bonds has caused noticeable pain to sentiment. Investors expressed dismay that BoE Governor Andrew Bailey announced a decision to hold interest rates just two weeks after he said the central bank would need to act. And demand for this week’s Australian bond auctions more than halved from levels seen in September.
More importantly, bottom lines are being hit. Brevan Howard Asset Management’s AS Macro Fund tumbled 4.3% in October amid last week’s upheaval, according to people with knowledge of the matter, the worst monthly performance since its 2017 debut.
A strong payrolls report is seen “likely keeping the market’s pricing for Fed rate hikes little changed but lending additional support to curve steepeners and TIPS breakevens,” wrote TD Securities strategists including Jim O’Sullivan in a note. “We see the risks to the report as somewhat asymmetric, however, with a weak reading potentially leading the market to sharply price out near-term hikes.”
©2021 Bloomberg L.P.