Yahoo Finance Traders Count Down to Fed With No Relief in Sight for Bonds
(Bloomberg) -- Global bond markets will take their next cue from Wednesday’s Federal Reserve stance, which risks pushing a rebound in fixed-income assets further into the future.
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US policymakers are expected to signal no imminent plans for interest-rate cuts after a string of higher-than-expected inflation data, possibly keeping yields at the highest levels of the year. The two-year yield is hovering around 5%, the 10-year around 4.65%.
US Treasuries had their worst performance in 14 months in April as traders pared bets on how much easing the Fed stands to deliver. They went from pricing as many as three quarter-point rate cuts this year to just one, in November at the earliest. Now, a hawkish tilt from the Fed risks putting that single reduction into question too, especially if Powell signals that delaying cuts until 2025 is a possibility.
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“Fixed income investors may need to wait to benefit from US rate cuts,” said Brendan Murphy, head of global fixed income for North America at Insight Investment. “Everyone thought the Fed would be the first or one of the first central banks to cut rates this cycle, now it looks like it will be one of the last.”
Ahead of the FOMC meeting, traders were confronted with a slew of US economic releases that underscored the challenges facing the central bank. The ISM manufacturing gauge declined more than anticipated, falling back below 50, a sign of contraction, while a related measure of prices paid by factories unexpectedly rose to the highest level in more than a year.
Meanwhile, ISM’s gauge of manufacturing employment was stronger than expected, as was ADP’s separate measure of private-sector job creation, ahead of broader US labor data for April to be released on Friday.
All in, the flurry of data is “giving off stagflationary vibes,” said Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole SA. “All eyes on the Fed now with investors wondering how Powell will respond — whether he will put greater weight on the disappointing growth data or emphasize the sticky inflation. I think that the bar is high for any hawkish surprises.”
Also Wednesday, the US Treasury Department announced its quarterly debt issuance plans and the start of a buyback program that’s been under discussion for more than a year.
Powell began modulating his message on rates last month, signaling policymakers will wait longer than previously anticipated to cut interest rates. In March he said the Fed was “not far” from having enough confidence that inflation was moving sustainably toward its 2% goal.
“A good outcome tonight for Powell would be to see the market not move at all,” Hugh Gimber, global market strategist at JP Morgan Asset Management said in an interview with Bloomberg TV. “If he can get through this meeting without creating too much disruption it buys them time to digest the data that they clearly need to see a change in tone.”
Treasury traders are going into the Fed decision in a defensive mode and wagering on more losses. Futures market data for the week leading up to April 23 showed hedge funds building short positions, with commodity trading advisors, or CTAs, also joining the party. In the cash market, short wagers have risen to their biggest levels in three weeks, according to JPMorgan Chase & Co.’s latest client survey.
“We are still in an environment where growth can surprise to upside and labor market is tight,” said Lilian Chovin, head of asset allocation at Coutts & Co, who sees yields peaking around current levels, but is waiting for further clarity on US growth before going overweight Treasuries. “US exceptionalism continues to play out. I don’t want to lean against that in the rates market.”
--With assistance from Sujata Rao and Francine Lacqua.
(Adds US economic data releases and Treasury auction announcement beginning fifth paragraph, updates yield levels.)
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