Powell has the bond traders exactly where he wants it. The market is lacking conviction as to the Fed’s next step.
Split futures positioning allows the Fed to adjust policy swiftly in response to evolving economic data. The Fed chair gains flexibility without concerns about disrupting the major fixed-income market.
In a Wyoming speech, Powell stated the Fed’s readiness to tighten policy for inflation control. Investors will scrutinize upcoming data like monthly job reports to gauge significance.
The bond traders struggle between bullish and bearish sentiments remains uncertain despite treasury losses. Treasuries were set for four consecutive months of decline, complicating the determination of a clear victor.
By the week’s close, the 10-year yield slightly exceeded 4.2%, reaching a peak of 4.36% during the week, its highest since 2007.
A 1.3% decline in US Treasuries this month until Thursday, resulting in a marginal 2023 decrease, has been indexed.
What Drives Hedge Funds to Short Position?
Despite a year and a half since the Fed’s tightening commencement, deliberations continue on the approach toward the bond traders in the market. Major fund managers like JPMorgan Asset Management and TCW Group perceive a chance to enhance optimistic bets.
These managers aim to capitalize on rising benchmark yields by increasing their bullish positions. The belief is that the ascent in 10-year yields, exceeding half a point since June, will necessitate rate cuts. The approach reflects an expectation that heightened yields and the Fed’s tightening will lead to a 2024 recession.
Inflation’s persistence and increased US Treasury issuance drive hedge funds to favor short positions.
Bill Dudley suggests this is the end of the bond bull market
Bill Dudley, former New York Fed chief and Bloomberg Opinion contributor, suggests the end of the bond bull market.
As outlined in his article, Bill Dudley’s point of view suggests that the bond bull market era that began in the 1980s is coming to an end. He had previously predicted that the 10-year Treasury yield would increase substantially, based on his estimation of various factors, including the neutral short-term interest rate, average long-term inflation rate, and the term premium.
He argued that the strength of the economy and the deteriorating fiscal health of the US government, along with factors like increasing deficits and the supply of government debt, are contributing to this shift in the market and on the bond traders. Dudley also mentioned that the bond term premium, which has been low in recent years, could rise due to the threat of higher inflation.
He acknowledged that predicting near-term bond yield movements is complex, but he believes that the dynamics have changed, and higher yields are now more likely.
This emphasizes to investors that economic data will guide the Fed’s decisions and bond market evaluation. Swaps traders indicate a 66% probability of a quarter-point rate hike in November, following an anticipated pause.
The initial crucial report involves August’s employment figures, with an anticipated further slowdown in job growth. The Fed perceives the labor market’s persistent tightness, with a median prediction of reduced job expansion. After their September 19-20 meeting, policymakers received a new update on consumer inflation.
“We’ve been in a phase where data takes a back seat, focusing on September and Friday’s job report,” noted Brandywine Global Investment Management portfolio manager Jack McIntyre. The trajectory of inflation and wages holds more sway than supply on longer-term yield movement.
Bond traders remain uncertain about the neutral Interest rate
Economic economist Tiffany Wilding from Pacific Investment Management Co. cautioned bond traders and investors this week. According to him, the Fed might potentially halt temporarily and then raise rates in 2024 if both the consumer and the economy stay robust.
Investors are evaluating if structural economic shifts led to a higher Fed neutral policy rate. Reconsidering structural influences on the economy affects the surge in long-term yields.
If the economy experiences the effects of prior rate increases near year-end, during an expected recession, the idea of a low, neutral rate might become more convincing. Powell mentioned Friday that the current policy hampers economic activity, hiring, and inflation while the neutral rate’s uncertainty persists.
However, the exact neutral interest rate remains uncertain. That’s causing Juggling Ambiguity about monetary policy’s precise constraints.