Bond traders are following the Fed’s relentless lead in fighting inflation

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(Bloomberg) – Bond traders are learning to follow the oldest rule in the book: don’t fight the Fed.

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While Treasury yields have seen periodic pullbacks on hopes that the central bank will ease its rate hikes, they have been short-lived as central bank officials stick to their hawkish scenario. On Friday, another round of selling erupted after the monthly jobs report showed the jobless rate dropped unexpectedly as payrolls continued to rise at a healthy pace.

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This strength in the labor market should allow the Fed to continue its most aggressive monetary tightening in decades, even if Thursday’s consumer price index report shows a slight easing of inflationary pressures. Central bank officials have made it clear that they are determined to stay the course until they get inflation under control, which still remains well above their 2% target.

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The jobs data was « a slight disappointment compared to hopes that this report would provide a piece of evidence in favor of the camp that there is a downturn and a pivot underway, » said senior portfolio manager Jeffrey Rosenberg. by BlackRock Inc. on Bloomberg TV. Friday. But « next week we will have the most important report, which is the CPI report », given that some fear that « we are in a wage-price spiral ».

The relentless bond market rout has hit Treasury investors with a loss of around 13% this year and pushed two-year yields to around 4.3%, just below the 15-year high hit last month. With the stock market also under pressure, investors recently poured in the most cash since April 2020, according to Bank of America Corp.

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Others have started buying bonds again, betting that yields are high enough to cushion the blow of any price declines. Such buying has also periodically been fueled by speculation that the Fed will stop where markets currently expect it to, either due to a drastic downturn in the economy or turmoil in financial markets. Futures markets currently expect the Fed’s key rate to peak in a range of 4.5% to 4.75% in March.

Bill Gross, the former chief investment officer of Pacific Investment Management Co., and Jeffrey Gundlach, managing director of DoubleLine Capital, are among those who expressed optimistic views. Scott Minerd, global chief investment officer at Guggenheim Investments, said severe financial market stress will likely be key to when the Fed finally changes course.

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Read more: Bill Gross sides with Pimco Bond bulls to see yields peak

But bond bulls have already been burned looking to call the market bottom, only to see yields continue to rise in the face of persistently high inflation.

On Thursday, economists expect the Labor Department to report that the core consumer price index, which excludes volatile food and energy prices, accelerated in September to a jump 6.5% annual from 6.3% in August, although the monthly measure is expected to slow. Overall, the CPI is expected to rise 8.1% year-on-year, down slightly from the previous month.

“Markets are incredibly sensitive to CPI impressions as there is a tug of war in the bond market over whether the Fed has tightened enough or needs to be more hawkish,” said Eric Stein, chief investment officer, income securities. fixed, at Morgan Stanley Investment. Management.

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« The Fed will have to see several reports on inflation before it can be sure it’s under control, while forward-looking markets will price in the outcome, » he said. « The only answer the markets want to know is what the inflation number will be in a year’s time. »

What to watch

• Economic Calendar
  • October 11: NFIB Small Business Optimism
  • October 12: PPI; MBA Mortgage Applications
  • Oct. 13: IPC; unemployment benefit claims
  • Oct. 14: Retail sales; Import and export price index; U. of Mich Inflation Sentiment and Expectations
• Fed calendar:
  • October 10: Chicago Fed President Charles Evans; Fed Vice Chairman Lael Brainard
  • October 11: Loretta Mester, President of the Cleveland Fed;
  • October 12: Minneapolis Fed President Neel Kashkari; September FOMC Meeting Minutes; Fed Governor Michelle Bowman
  • October 14: Fed Governor Lisa Cook
• Auction schedule:
  • Oct. 11: Three-year ticket; 13, 26 week invoices
  • October 12: 10-year ticket
  • Oct. 13: 30-year bond; 4, 8 week invoices