Bond Traders Glimpse Taper-Talk Roadmap That Revives Volatility


Bond investors are confident that the months of calm in the treasury market will have a finite shelf life.

A job growth report in May that disappointed some traders sparked a breakout of short covers on Friday. But it left speculation intact that the U.S.'s recovery from the pandemic is strong enough to lead the Federal Reserve to finally start discussions this month on the idea of ​​scaling back its massive bond-buying program.

At the Fed meeting on March 15-16, No monetary policy move is expected in June. The options market is merging around an actual shift in August - with the potential to blow the returns off their volatility killer trading. At this point, the Fed traditionally holds its annual meeting in Jackson Hole, Wyoming, which has historically served as a place for major policy signals.

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"At least the Fed will acknowledge that it moved from the taper of not even talking about it to talking about it," said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle.

"Our schedule for an announcement would focus on Jackson Hole as a forum for academic discussion on the matter," and September as the base case for the unveiling of a plan to reduce bond purchases, bringing the 10-year yield to likely 2% by the time End of the year, he said.

hike precursor

Tapering is hugely important to financial markets as the Fed has signaled that it will be a precursor to actual rate hikes. While policymakers are predicting they will keep overnight rates near zero through at least 2023, bond traders have been betting for months that the rebound will come earlier this year.

With investors sticking to these expectations for the time being, volatility has collapsed. A measure of future Treasury price volatility is roughly the lowest since February. And 10-year yields have been hovering 1.6% for weeks after hitting a more than one-year high of 1.77% in March.

Preparing for the Fed's June 16 decision is not risk-free. Coming next week is a report that is forecast to show consumer prices accelerated the fastest since 2008 in May. It did so after April's higher than forecast levels pushed yields towards the upper end of their most recent range. There's also a $ 120 billion round of promissory note and bond auctions set to be absorbed next week.

Jeffrey Rosenberg, a senior portfolio manager at BlackRock Inc., also saw the May job report - which included robust wage growth - leaving the Fed on track to send some signals in June of a slow move towards an eventual reduction in asset purchases.

In search of progress

The Fed is currently buying around $ 120 billion in debt every month - $ 80 billion in government bonds and $ 40 billion in mortgage-backed securities. The central bank has announced that it will continue to do so until it has made “significant further progress” towards its employment and price targets.

Further out, bets have surfaced in the options market on a shock at Jackson Hole aimed at a more aggressive interest rate outlook for the Fed.

"Until the Fed speaks of tapering or we get an ugly inflation figure, the current yield levels will hold for the time being," said Gary Pollack, head of fixed income for private wealth management at Deutsche Bank. “But I expect the returns will be higher by the end of the year, with the 10 year returns rising to 2%. The outlook for the US economy is still good. "

What can be seen

  • The economic calendar

    • June 7th: consumer credit
    • June 8: NFIB Small Business Optimism; Trade balance; JOLTS job offers
    • June 9: MBA Mortgage Applications; Wholesale stocks / commercial sales
    • June 10: CPI; Unemployment claims; real average earnings; Long consumer convenience; Change in budget of net assets; monthly budget statement
    • June 11: Mood of the University of Michigan
  • The Fed calendar is empty

  • The auction calendar:

    • June 7: 13-, 26-week bills
    • June 8: Cash Management Bills; 3 year notes
    • June 9: 10-year grades
    • June 10: 4-, 8-week bills; 30 year bonds

- With the assistance of Edward Bolingbroke

Before it's here, it's at the Bloomberg Terminal.

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https://thedailytradingnews.com/bond-traders-glimpse-taper-talk-roadmap-that-revives-volatility/

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