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Bond Traders Confront Fears in Week That May Change Everything

Image: Bond Traders Confront Fears in Week That May Change Everything
(Dollar Photo Club)

Monday, 30 Oct 2017 12:22 PM

This week is fraught with peril for Treasuries traders, no matter if they’re bulls or bears.

The next five trading days will bring a torrent of market-moving information: President Donald Trump is poised to finally announce his nominee to lead the Federal Reserve; U.S. central bankers have an interest-rate decision to make; the first possible charges from special counsel Robert Mueller’s probe into Russian meddling in the 2016 presidential election; a House committee is set to release a tax bill; and the Treasury will unveil plans to issue more debt to make up for lost funding from the Fed.

Oh, and investors will also get the latest reading on the nation’s job market and the central bank’s preferred inflation gauge.

It’s a lot to digest. What’s more, it all comes at a pivotal time, with 10-year yields breaking above the crucial 2.4 percent level and touching a seven-month high of 2.48 percent. With yields entering a new, elevated range, traders are bracing for turbulence as they ponder the direction of the world’s biggest bond market for the remainder of 2017.

“I would definitely expect those ranges to be tested in a big way,” said Michael Lorizio, a senior trader at Manulife Asset Management, which oversees $370 billion. “The information we get in the next week should allow people to feel more confident in their longer-term views, and more aggressively position for those views going into the end of the year.”

Signs are emerging that volatility is returning to fixed income, after it fell to a record low in August. Bank of America Corp.’s MOVE Index, which tracks swings in Treasury options, jumped last week to the highest in five months.

Commentary around higher yields may have added to the volatility.

DoubleLine Capital LP’s Jeffrey Gundlach called it “the moment of truth” for the bond market’s three-decade bull run after yields broke through 2.4 percent. Bill Gross at Janus Henderson Group said this month that a sustained move through that level would signal the end of the 30-year rally.

Enthusiasm Curbed

The full slate of events ahead and the prospect of market turmoil could scare away buyers until the dust settles, Lorizio said. Even investors who consider Treasuries oversold might prefer to wait, either for confirmation that yields will drop or for an even more attractive entry point.

“Given the big move in Treasuries, it would warrant some caution coming into the week,” said Alex Li, head of U.S. rates strategy at Credit Agricole SA.

The latest read on positioning in futures markets indicates that restraint. 

Hedge funds and other large speculators cut back on bets against two- and five-year Treasury maturities in the week through Oct. 24, after their net shorts reached record highs, Commodity Futures Trading Commission data show. On the flip side, asset managers’ net duration across the Treasury curve dropped.

It’s a frightening week to take a big bet one way or the other.

What to Watch

  • Trump is poised to announce his nominee for Fed chair by Nov. 3, before he departs for Asia
    • NOTE: Treasuries rallied as betting website PredictIt showed traders jumping on bets in favor of Fed Governor Jerome Powell
  • In Congress, the House Ways and Means Committee is expected to release on Nov. 1 legislation for tax cuts
  • Multiple reports suggest that at least one person’s been charged in relation to Mueller’s Russia probe and could be arrested as early as Monday morning
  • It’s a critical week of economic data, with releases on inflation and the labor market
    • Oct. 30: Personal income and spending, PCE data, Dallas Fed manufacturing activity
    • Oct. 31: Employment cost index, S&P CoreLogic Case-Shiller indexes, MNI Chicago Business Barometer, consumer confidence
    • Nov. 1: ADP employment change, construction spending, Markit U.S. manufacturing PMI, ISM manufacturing, prices paid, new orders and employment
    • Nov. 2: Challenger job cuts, initial jobless claims, continuing claims, nonfarm productivity, unit labor costs, Bloomberg consumer confidence
    • Nov. 3: Change in nonfarm payrolls, unemployment rate, average hourly earnings, labor-force participation rate, trade balance, factory orders, durable goods orders, Markit U.S. services and composite PMIs
  • The FOMC is expected to leave rates unchanged Nov. 1 and set up a hike in December
    • On Nov. 2, Powell and N.Y. Fed’s Dudley speak at alternative reference rates event, while Atlanta Fed’s Bostic speaks in Chicago about government statistics
    • On Nov. 3, Minneapolis Fed’s Kashkari speaks on housing and finance
  • The Treasury has bill auctions scheduled; traders will focus on the department’s refunding announcement Nov. 1
    • Most firms say Treasury will only lift bill auction sizes, while a few predict they will also increase note issuance amounts
    • It would be the first time for Treasury to increase coupon auction sizes since 2009
    • Traders will also watch for any sign that Treasury intends to add an ultra-long maturity

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It’s a lot to digest. What’s more, it all comes at a pivotal time, with 10-year yields breaking above the crucial 2.4 percent level and touching a seven-month high of 2.48 percent.
bond, traders, fears, change
Monday, 30 Oct 2017 12:22 PM
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