Bloomberg
Dizzying bond traders are preparing for more pain than Fed spokesmen are lining up
(Bloomberg) – Last week’s turmoil in the $ 21 trillion government bond market has enabled shocked traders to post even more losses. This increases the pressure on Federal Reserve officials to respond to the staggering surge in yields. According to Jefferies International, Thursday’s closing price was the shortest in Treasuries since the 2013 Taper Tantrum episode. In the meantime, expected volatility, a warning flag for all asset classes, is rising, and the market is moving towards pricing a Fed recovery near zero End of 2022, at least a full year earlier than signaled by the central bank. With this in mind, Fed chairman Jerome Powell will likely make his final public comments ahead of a mid-month political meeting. A bevy of other officials will speak before he takes center stage later in the next week. They come after a stretch that has spawned a dizzying list of superlatives, including the steepest weekly rise in five-year yields in months and the biggest spasms in the yield curve since the beginning of the pandemic. In addition, 10-year returns, a measure of global borrowing, rose to their highest level in a year. While they pulled back sharply on the month-end buy, the first move helped quell the speculative euphoria that sustained risky assets. All in all, the upcoming Fed remarks are big news for all markets, not just bond traders looking for higher returns. “There are two risks on the agenda next week,” said Gennadiy Goldberg, a senior US interest rate strategist at TD Securities. “Fed officials could just stick to their script and suggest that the rate hike was only for good reasons. This would reward investors positioned to take short positions. Alternatively, policymakers could “acknowledge that they are somewhat concerned that the market is pulling rate hike expectations forward, reaffirm their patient stance and propose an overly rapid rate hike that may exacerbate financial conditions” – all of which would benefit investors who want to lean against the jump in returns. Ten-year government bonds ended the week at 1.4%, well below their high of 1.61%, which hit Thursday’s highest level since February 2020.The most brutal part of that jump came after demand hit the 7-year -Banknote auction of the Treasury had collapsed. The resulting bloodshed, led by the 5 year note, squeezed bets on steeper trades and other positions affecting that part of the curve. In treasury options, the put-to-calls shift is the most extreme since 2012, indicating that traders are still positioned for higher returns – and convexity shocks remain a threat. With traders looking rosier on the economy with the introduction of vaccines and calling for additional U.S. virus relief, the swap market now rates the Fed’s first hike closer to December 2022 versus mid-2023 earlier in the week. The Fed itself has not signaled any tightening until 2023. Another problem adding to the market jitter is the impending expiration of the pandemic-time exemptions on March 31, which will allow banks to buy more bonds. In a statement this week, Powell said the Fed is looking at what to do about the relief. According to Jefferies, momentum investors still have ammunition to fuel the bond selloff. This is a major reversal from a neutral stance three weeks ago. “It’s the shortest since the 2013 tantrum, but it’s still not extreme, which suggests momentum players have more room to add,” said Mohit Kumar, strategist at Jefferies. “But at these levels, returns are unlikely to rise at the rate or extent that the market has seen this week.” The bond bears have some key numbers to focus on. The job data for February will be published on Friday. The median estimate sees non-farm payrolls increasing by 171,000, a rebound from January. Any signs that the labor market is not recovering could affect reflation bets. For Thomas Pluta, global director of linear rate trading at JPMorgan Chase & Co., yields could continue to rise next week and beyond. However, he does not assume that the Fed will defend itself against the rise, at least for the time being, by adjusting its bond purchases or the duration of its government bond holdings. Further turbulence is possible, says Jamie Anderson, head of US trading for Insight Investment A large number of “countercurrents driving different parts of the rates market”. There is a risk of “persistently high realized volatility” for the next week as Fed comments on government bond support would put short positions under pressure. Failure to address the issue can boost sales in anticipation of auctions the following week. At least one other issue will be on alert for the next week. With a barrage of cash in the funding markets pushing front-end interest rates to zero, the prospect is that the Fed may have to tinker with the interest rate it pays on excess reserves – known as IOER – one of the tools to use which they control their interest rates policy goal. WHAT TO CONSIDEREconomic Calendar: March 1st: Markit Manufacturing PMI; Construction expenses; ISM Manufacturing March 3: MBA Mortgage Applications; ADP employment; Markit Services PMI; ISM services; Fed Beige BookMarch 4: Downsizing at Challenger; Productivity outside of agriculture; Unemployment claims; Long consumer convenience; Orders for factories, durable goods, and capital goodsMarch 5: Payroll outside of agriculture; Trade balance; Consumer CreditFed Calendar: March 1: John Williams of the New York Fed; Governor Lael Brainard; Raphael Bostic from the Atlanta Fed, Loretta Mester from the Cleveland Fed, Neel Kashkari from the Minneapolis Fed on the virtual panel March 2: Brainard; Mary DalyMarch 3 of the San Francisco Fed: Patrick Harker of the Philadelphia Fed; Bostic; Charles Evans of the Chicago Fed; Beige BookMarch 4: Powell Discusses US Economy at Virtual Event; BosticAuction schedule: March 1: 13, 26 week bills March 2: 42 day cash management bills March 4: 4, 8 week bills For more items like this please visit us at bloomberg.com for trusted source Business news. © 2021 Bloomberg LP
