2023-10-22 02:14:36
A surprisingly strong U.S. economy and conflicting signals from the Federal Reserve are adding to the wild swings in U.S. Treasuries. Market watchers expect volatility to only increase in the coming months due to geopolitical uncertainty and a surge in the supply of U.S. debt.
U.S. Treasuries are considered the “world’s safest asset,” but their yields have recently fluctuated dramatically on an almost daily basis. The yield on the 10-year Treasury note rose and fell by regarding 40 basis points (bp, 0.01%) during the week ending on the 20th. The economy is being swayed by a variety of factors, including steady trends in retail sales and employment statistics, a series of statements from U.S. financial officials, and a flight to quality amid concerns regarding the escalation of conflict in the Middle East.
“It’s going to be rough, so buckle up,” Mike Schumacher, head of macro strategy at Wells Fargo Securities, told Bloomberg Television. Interest rate movements “will remain fairly high until at least the middle of next year, probably until the situation in the Middle East calms down,” and until there is more clarity on U.S. monetary policy, he said.
The ICE/BofA/MOVE index, which measures the expected rate of change in U.S. Treasury yields factored into one-month options, has risen for the fifth consecutive week. In fact, by some measures, long-term interest rates are moving more than stocks have in at least 18 years, according to data compiled by Bloomberg.
Mohamed El-Erian, chief economic adviser at Allianz and a Bloomberg Opinion columnist, said this is partly because the Federal Reserve has not been able to articulate a long-term vision for the direction of interest rate policy.
“There will continue to be great uncertainty because we don’t have a vision of where the U.S. economy is going,” he said on Bloomberg Television on Tuesday. The authorities argued that “we need to shift from excessive reliance on data to one that is more forward-looking.”
Federal Reserve Chairman Jerome Powell’s comments on the trajectory of monetary policy on the 19th caused great confusion. In a speech at the New York Economic Club, the chairman signaled that he was leaning toward keeping rates on hold at the next Federal Open Market Committee (FOMC) meeting, but did not leave open the option of further rate hikes in case growth picks up once more. I also left.
In response to his remarks, short-term bond yields fell, while long-term bond yields rose to multi-year highs, and the yield curve of U.S. Treasury bonds steepened significantly (the inverted yield narrowed).
geopolitics and supply
The price movements in the week ending on the 20th were partly due to growing concerns that the war between Israel and the Islamic group Hamas might spread across the region and involve the United States.
Reports of drone strikes in Iraq and Syria, the firing of cruise missiles by Yemen’s Houthi rebels into Israel, and Israeli attacks on Hamas and Lebanese pro-Iranian militia Hezbollah have increased investors’ security consciousness. .
Concerns regarding the future of the US government’s finances are also having an impact on investor sentiment.
The so-called term premium has risen by more than a percentage point in the past three months, fueling a dramatic rise in long-term interest rates, due in part to increased U.S. Treasury issuance. Traders are already bracing for the U.S. Treasury to announce a further increase in issuance size in its next quarterly auction on Nov. 1.
“Volatility is begetting more volatility,” said William Marshall, head of U.S. rates strategy at BNP Paribas. “At this stage there is a general lack of strong conviction regarding where things should settle.”
Officials may stop speaking in the week starting on the 23rd ahead of the next FOMC meeting, but the Personal Consumption Expenditures (PCE) price index, an important inflation indicator, will be released on the 27th, and the University of Michigan’s inflation data will be released on the 27th. An expected survey will also be announced on the same day.
Original title:Wild Treasuries Swings Just Starting as Bond Traders ‘Buckle Up’(excerpt)
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