While many on Wall Street feel relieved that the Federal Reserve might be finished with interest rate hikes, it’s important to note that this doesn’t guarantee an end to volatility in the bond market.
Various factors, such as economic uncertainties, inflation concerns, and global events, can still contribute to fluctuations and challenges in the bond market despite the potential pause in interest rate increases.
Investors foresee increased turbulence in US Treasuries due to economic uncertainty, potentially leading to higher rates. Heightened volatility could result from economic uncertainty impacting the central bank’s trajectory and rate expectations.
Certain Fed officials highlight ongoing efforts due to persistent inflation exceeding the 2% target despite substantial monetary policy tightening. Barclays advises clients to sell two-year Treasuries, expecting elevated rates in the upcoming year. This contradicts widespread speculation of Fed rate cuts starting in March.
The 10-year benchmark yields, foundational for finance, approach high levels seen last year. Some experts at Barclays recommend divesting two-year Treasuries, foreseeing sustained higher rates. Contrary to general expectations, the possibility of Fed rate cuts is contested, influencing market dynamics.
Invesco’s chief strategist, Rob Waldner, attributes the surge in long-term yields to the Fed’s hawkish stance as it contributes to elevated uncertainty.
Debt Sale Rise Burdens Bond Market
The bond market is burdened by uncertainty and rising debt sales due to growing federal deficits. Despite notable interest rate increases, the Treasury market yielded a mere 0.1% return this year.
Bloomberg’s index indicates underwhelming gains compared to initial expectations upon the Fed’s rate hike slowdown. Mounting deficits and market uncertainty impact bond performance, leading to modest Treasury market returns.
September Policy Meeting
Following the central bank’s July policy meeting, which saw a quarter-point increase in the overnight rate, Chair Jerome Powell emphasized that the upcoming September meeting’s outcome would depend on data released over the subsequent two months.
Current indications support the expectation of the central bank maintaining stability in September, given subdued job growth and easing inflation signals. However, the core consumer price index, excluding volatile elements, increased by 4.7% annually in July.
Increase in Treasury Yields
Recently, a producer price index exceeded projections, increasing Treasury yields across various durations. Anticipated September stability aligns with reports of job growth slowdown and easing inflation. Despite these trends, core consumer prices and producer index impact Treasury yields in multiple maturities.
Next week, traders will closely examine the July 25-26 FOMC meeting minutes for rate direction insights and differing opinions among policymakers.
Importance of Central Bankers Meeting
The imminent annual meeting of international central bankers in Jackson Hole, Wyoming, is of significant interest. This event might allow Chair Powell to challenge market expectations, which currently anticipate a Federal Reserve key rate reduction to approximately 4% by January 2025. Presently, the rate resides between 5.25% and 5.5%.
Skeptical Stock Market Momentum
Kerrie Debbs, a certified financial planner at Main Street Financial Solutions, cautions clients against assuming bonds as a guaranteed refuge from risk and expresses skepticism about the sustainability of the stock market’s upward momentum. Debbs points out various factors, such as ongoing inflation, concerns about US government debt’s credit quality, surging budget deficits, global political instability, and more, that could disrupt current positive market trends. Debbs manages approximately $70 million in assets for around 50 clients.
Subadra Rajappa of Societe Generale remarks on committee split. “There’s division within the committee,” noted Subadra Rajappa. Market pricing indicates uncertainty, with six modest cuts expected. The market foresees six shallow cuts, reflecting prolonged higher rates. Anticipated minor cuts reflect extended periods of elevated rates.
Surge in Capital as Investors Entering Market
According to Anna Wong, FOMC minutes on August 16 will likely reveal most officials see disinflation progress yet remain uncertain about ending rate hikes.
However, some investors are entering the Treasury market due to elevated interest rates and worries over the sustainability of the current stock market surge. Bank of America Corp. strategists predict a record year of inflows into US Treasuries.
Bank of America Corp. suggests that US Treasuries are poised to experience an unprecedented surge of capital inflows this year.
