Bond Traders Follow Fed’s Lead With No Let-Up in Inflation Fight

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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 rate hikes, they have been short-lived as central bank officials stick to their false script. A fresh round of selling erupted on Friday after the monthly jobs report showed the jobless rate unexpectedly fell as payrolls continued to grow at a solid pace.

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That strength in the labor market is likely to keep the Fed on track to continue its most aggressive monetary policy tightening in decades, even if Thursday’s consumer price index report shows a slight decrease in inflationary pressures. Central bank officials have made it clear they are determined to stay the course until they get inflation under control, which still remains well above its 2% target.

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The jobs data was “a slight disappointment relative to the expectation that this report would provide evidence in favor of the field that there is a slowdown and a turnaround underway,” said Jeffrey Rosenberg, senior portfolio manager at BlackRock Inc. on Bloomberg TV. Friday. But “next week we will have the most important report, which is the CPI report” given the concern of some that “we are in a wage-price spiral”.

The relentless bond market rout has hammered Treasury investors with a 13% loss this year and pushed two-year yields to around 4.3%, just shy of a 15-year peak from last month With the stock market also under pressure, investors recently poured in more cash than in 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 avoid the impact of any price falls. That buying has also been periodically fueled by speculation that the Fed will stop earlier than markets expect, either because of a sharp slowdown in the economy or turmoil in financial markets. Futures markets are pricing in the Fed’s key rate to peak in a range of 4.5%-4.75% in March.

Bill Gross, the former chief investment officer of Pacific Investment Management Co., and DoubleLine Capital Chief Executive Jeffrey Gundlach are among those who have expressed bullish views. Scott Minerd, global chief investment officer at Guggenheim Investments, said severe strains in financial markets are likely to be the key to when the Fed finally reverses course.

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Read more: Bill Gross Sides with Pimco Bond Bulls as Yields Peak

But bond bulls have burned themselves before trying to bottom out, 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 6.5% annual increase from 6.3% from August, although the month-on-month measure is expected to decline. Overall, the CPI is expected to grow by 8.1% year-on-year, only slightly down from the previous month.

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

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“The Fed will need to see several reports on inflation before they are confident they have it under control, while futures markets will anticipate the outcome,” he said. “The only answer the markets want to know is what the inflation number will be a year from now.”

what to watch

• economic calendar
  • October 11: NFIB Small Business Optimism
  • October 12: PPI; MBA mortgage applications
  • October 13: CPI; unemployment claims
  • October 14: Retail sales; Import and Export Price Index; U. of Mich. Sentiment and Inflation Expectations
• Fed Calendar:
  • October 10: Charles Evans, president of the Chicago Fed; Lael Brainard, Vice President of the Fed
  • October 11: Cleveland Fed President Loretta Mester;
  • October 12: Neel Kashkari, President of the Minneapolis Fed; Minutes of the September FOMC meeting; Fed Governor Michelle Bowman
  • October 14: Fed Governor Lisa Cook
• Auction Calendar:
  • October 11: three-year note; 13 and 26 week invoices
  • October 12: 10-year note
  • October 13: 30-year bail; 4 and 8 week invoices