ADVERTISEMENT

Evacuation From Bond Bunker Faces Test as Fed Meets

Evacuation From the Bond Bunker Faces Key Test as the Fed Meets

(Bloomberg) -- The rush to the exits from the safety of Treasuries pushed 10-year yields up the most in a week since the aftermath of President Donald Trump’s election victory in 2016. The question now is whether investors will turn around and run right back into the haven trade if the Federal Reserve surprises markets or trade talks between the U.S. and China hit a snag.

While the Fed is expected to cut rates at the conclusion of their two-day meeting on Sept. 18, market participants will be focused on insights for the future path of policy from Chairman Jerome Powell and his colleagues. Futures traders have pared back how much Fed easing they foresee, now pricing in slightly less than a 100% chance for a quarter-point cut next week and another cut of that size by the end of the year. At one point last month, futures were signaling a strong probability the benchmark rate would be reduced by 75 basis points by the end of 2019.

Treasury bond bulls have been stung this month, with yields rising across all maturities after returns in August were the best since 2008. The 10-year yield rose almost 34 basis points in the week to end Friday just below 1.90%, up from a three-year low of 1.43% at the start of the month. Still, not all economic data is showing strength and fresh readings on industrial production, housing and consumer confidence could reignite recession concerns.

“The market now expects a bit of Goldilocks with a few more Fed rate cuts and Trump willing to back away from the trade war, with the thinking ‘just don’t look at the worsening economic data over there,’” said Mark Spindel, chief investment officer at Potomac River Capital. “It feels just a little too perfect to me. It’s hard to figure out how much is too much as far as the flight from the safety trade.”

Evacuation From Bond Bunker Faces Test as Fed Meets

The latest quarterly chart of policy-makers’ rate projections, widely known as the dot plot, could give the rise in yields more fuel if officials don’t bump up the pace of easing relative to their June views, according to Josh Wright, chief economist at iCIMS, a recruitment technology provider based in Holmdel, New Jersey.

There wasn’t any update to the dot plot at the July FOMC meeting, when officials cut rates by a quarter point. In June, eight of 17 policy makers penciled in a reduction by the end of the year, while seven of those forecasting a half percentage point fall. Eight projected no change and one a hike. The median of forecasts for where the funds rate would end 2020 was 2.125%, which at that time indicated one quarter-point cut next year.

“What happens with the dot plot will matter because that’s more about the outlook,” Wright said in an interview at iCIMS’ office. “That is what the market will be focused on, supremely.”

What to Watch

  • The key event in the week ahead is the Sept. 18 Fed policy decision
  • Here’s the U.S. economic calendar:
    • Sept. 16: Empire manufacturing
    • Sept. 17: Industrial/manufacturing production and capacity utilization; NAHB Housing market index; Treasury International Capital flows
    • Sept. 18: MBA Mortgage applications; building permits; housing starts; FOMC rate decision
    • Sept. 19: Current account balance; Philadelphia Fed business optimism; initial jobless claims; Bloomberg consumer comfort; leading index; existing home sales
    • Sept 20: Household change in net worth
  • Fed speakers will be absent until after the FOMC meeting
    • Sept. 20: New York Fed President John Williams, Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan speak
  • Here’s the Treasury auction schedule:
    • Sept. 16: $45 billion of 3-month bills; $42 billion of 6-month bills
    • Sept. 19: 4- and 8-week bills; $12 billion 10-year TIPS reopening

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, Michael P. Regan, Mark Tannenbaum

©2019 Bloomberg L.P.