(Bloomberg) — The year has been tumultuous for US Treasuries, and the upcoming week will be crucial in determining its outcome.
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Investors will receive updates on the major factors driving the unusually high volatility in the US bond market, which is heading towards an unprecedented three-year loss. The recent escalation of the Israel-Hamas conflict will also capture the attention of investors, although concerns over monetary and fiscal policies have overshadowed the inflow of funds into Treasuries in recent weeks.
The federal government will announce the number of new bonds it plans to sell to cover the budget deficit, testing the market’s capacity to absorb the seemingly endless supply of Treasuries. The Federal Reserve and the Bank of Japan will indicate the future direction of monetary policy, which will impact demand from foreign buyers. Additionally, the Labor Department will release its monthly employment report, a closely watched indicator of the economy’s response to tighter monetary policy.
This is a crucial moment for the bond market. 10-year Treasury yields briefly surpassed 5% for the first time since 2007 before retreating, causing uncertainty among investors. There is disagreement on whether yields will continue to rise with a strong economy or decline due to high interest rates dampening economic growth.
“We’re going through a period of volatility,” said Amar Reganti, a fixed-income strategist at Hartford Funds and former deputy director of the US Treasury’s debt-management department. “The data is uncertain, there’s uncertainty about the composition of Treasury supply, and then there’s a shift among the buyer base.”
Here are some of the key events to watch in the upcoming week:
Bank of Japan
The Bank of Japan’s decision in late July to loosen its control on long-term yields and allow them to rise slightly contributed to a global sell-off of fixed-income securities. Japanese investors, who have higher interest rates in overseas government bonds, became less inclined to buy them. The markets are closely watching the BOJ’s meeting on October 30-31 for further indications.
“The more they do away with yield-curve control, that’s a bearish impulse on the back end of the Treasury curve,” said Stephen Bartolini, a fixed income portfolio manager at T. Rowe Price. The BOJ is “on our checklist of things to mark a high in US yields. Getting off of yield-curve control could lead to the sort of the final impulse in this cycle.”
Treasury Sales
One of the most important events of the week will take place on November 1, when the Treasury Department announces its plans for bond sales in the coming months. In August, long-term yields rose after the quarterly refunding indicated an increase in debt sales for the first time in over two years.
Treasury Secretary Janet Yellen has denied the speculation that rising yields are a result of the need to finance the growing deficit. However, investors remain skeptical, viewing it as a warning sign that the market will demand higher returns due to the nation’s fiscal irresponsibility.
What Bloomberg Intelligence Says…
“Treasury-auction sizes may be increased across the board at next week’s refunding announcement as government deficits could remain above $1.5 trillion in fiscal 2024, and look poised to climb above $2 trillion in FY25. We initiate FY26 issuance forecasts, expecting further increases in coupon and Treasury-bill issuance.”
— Ira F. Jersey and Will Hoffman, BI strategists
Click here to read the full report
FOMC Meeting
On the same day, at 2 p.m., the Federal Open Market Committee (FOMC), the Federal Reserve’s policy-setting arm, is expected to announce that it will maintain rates at a 22-year high of up to 5.5%. The markets believe that the Fed’s series of rate hikes is over, especially after Chair Jerome Powell stated that rising long-term yields make further tightening less necessary.
Job Market
The assumption that the Fed has concluded its tightening policy depends on whether the labor market and wage increases cool down enough to alleviate inflationary pressure. Economists expect the September payroll report to provide insight. Combined with ongoing auto-worker strikes, disappointing earnings from certain companies, and the resumption of student loan payments, a weak payroll reading would suggest a loss of momentum in the economy, according to Spencer Hakimian, CEO of Tolou Capital Management.
“The risks to consumption are materially to the downside,” he said. “An allocation to longer-duration government debt, therefore, makes sense in our eyes.”
What to Watch
- Economic data:
- Oct. 30: Dallas Fed manufacturing activity index
- Oct. 31: Employment cost index; FHFA house price index; S&P Corelogic CS 20-city and US house price index; Conference Board consumer confidence; Dallas Fed services activity
- Nov. 1: MBA mortgage applications; ADP employment; S&P Global US manufacturing PMI; construction spending; Jolts job openings; ISM manufacturing; Wards total vehicle sales
- Nov. 2: Challenger job cuts; unit labor costs; initial jobless claims; durable goods orders; capital goods orders
- Nov. 3: US non-farm payrolls; S&P Global US services and composite PMIs
- Fed Calendar
- Auction calendar:
- Oct. 30: 13-, 26-week bills
- Oct. 31: 52-week bills; 42-day cash management bills
- Nov. 1: Treasury quarterly debt refunding announcement; 17-week bills
- Nov. 2: 4-, 8-week bills
–With assistance from Liz Capo McCormick and Lisa Abramowicz.
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