A Surprisingly strong U.S. economy and mixed signal The Fed’s policies have spurred some of the sharpest volatility in U.S. Treasuries in recent memory.Add geopolitical anxiety and surge debt supply Market observers say there are reasons for continued volatility in the coming months.
U.S. Treasuries, known as “the safest asset in the world,” have it all, but recent large swings in yields are an almost daily occurrence. Just this week, 10-year Treasury rates swung in a range of nearly 40 basis points, buffeted by countercurrents including elastic currencies. retail sales and unemployment figures, a large group Comment Pressure from Fed officials and concerns about escalating conflicts in the Middle East have led to rising demand for safe-haven assets.
“This is going to be a rough ride, so buckle up,” Mike Schumaker, head of macro strategy at Wells Fargo Securities, said on Bloomberg TV this week. Interest rate volatility should “remain at a fairly high level, at least until the middle of next year, and may intensify further as the Middle East issues are resolved” until the market’s view of the Fed becomes clearer.
The ICE BofA MOVE Index, which tracks expected moves in U.S. Treasury yields priced in one-month options, has risen for five consecutive weeks. In fact, by one measure, long-term interest rates have moved more than stock rates by the most in at least 18 years, according to data compiled by Bloomberg.
Mohamed El-Erian, chief economic adviser at Allianz Group and a Bloomberg Opinion columnist, said part of the reason is that the Fed is trying to communicate its long-term vision for where interest rate policy will go.
“We’re going to continue to be in this situation of great uncertainty because there’s no vision for where the economy is going to go,” El-Erian said on Bloomberg Television on Friday. “They need to move away from over-reliance on data to having more Big forward-looking data reliance.”
Amid the turmoil of the past week, nothing caused more confusion than Federal Reserve Chairman Jerome Powell’s comments on Thursday about the trajectory of monetary policy.he suggestion At an event at the Economic Club of New York, the Fed leaned toward keeping interest rates steady at its next meeting, while potentially raising rates again later if policymakers see further signs of strong economic growth.
In response, the interest rate curve steepened sharply, with short-term yields sliding while long-term yields climbed to multi-year highs.
geopolitics, supply
Growing concerns that the war between Israel and Hamas could spread across the region and possibly the United States also contributed to last week’s price volatility.
Reports of drone strikes in Iraq and Syria, Yemeni Houthi rebels firing cruise missiles into Israel, and Israeli attacks on Hamas and Hezbollah have prompted investors to adopt conservative risk-off strategies, driving up 10-year Treasury yields It retreated from highs just below 5% and ended the week at around 4.91%
Concerns about the fiscal future of the United States are also increasingly affecting investor sentiment.
Rising U.S. debt issuance helps boost so-called regular premium It has risen more than a percentage point in the past three months, pushing long-term interest rates sharply higher. Traders are already waiting for the Treasury Department to announce a further increase in auction size when next quarter refunds are due on November 1.
“Volatility is causing more volatility,” said William Marshall, head of U.S. rates strategy at BNP Paribas. “There’s a general lack of conviction at this stage about where things should land.”
What Bloomberg strategists say…
“If the U.S. doesn’t go into recession, it’s hard to see what would drive a significant sustained rally in bonds. A recession depends on the services part of the economy, and the outlook for that part is balanced.”
– Simon White, macro strategist
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Looking ahead, the Fed’s pause in speeches next week may be a welcome respite for traders as it implements its customary blackout period ahead of its Nov. 1 policy meeting.
However, the coming days will provide some key data on price pressures in the economy, including Friday’s personal consumption expenditures data, the Fed’s preferred inflation gauge. The University of Michigan survey of inflation expectations will be released on the same day.
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