Bond traders intensify concentration on jobs
THE world’s biggest bond market won’t have to wait long for its next potential volatility jolt, with a pivotal US jobs reading ahead that will help shape bets on the path of Treasury yields for the remainder of 2021.
The yield curve just posted its first week of steepening since July, rebounding from its f lattest level in a year after a highly anticipated speech by Federal Reserve Chair Jerome Powell. He stressed that the central bank could start slowing its debt purchases in 2021, though it won’t rush to begin raising rates thereafter.
He also expressed caution about the surging delta variant, leaving traders to focus on August jobs data to gauge at which of the three remaining 2021 policy meetings the Fed might be confident enough to unveil its tapering plans. Against that backdrop, robust labor figures on September 3 could extend the steepening trend by fueling bets tapering will come sooner rather than later.
“Powell did an exceptional job of trying to separate the requirements and thresholds for tapering as being very different—saying there was a substantially more stringent test for rate hikes,” Gene Tannuzzo, a portfolio manager at Columbia Threadneedle, said in a phone interview. “So I think if it is better-than-expected data through this delta surge and the tapering is happening, that the yield curve could steepen.”
The median projection is for an addition of 750,000 jobs in August, compared with a gain of 943,000 in July. An above-forecast August figure will likely put the 10-year yield on course toward 1.5 percent or higher, Tannuzzo said, from about 1.3 percent now.
Volatility opportunity
IT may also offer traders a burst of volatility. The ICE Bofa MOVE Index—which tracks implied price swings in Treasuries—is hovering around its average for 2021, after Powell’s Friday speech failed to spur much in the way of turbulence.
The yield curve, as measured by the gap between 5-year to 30-year yields, is around 111 basis points. It’s f lattened from a 2021 peak of 167 basis points touched in February— an inflection point that some Wall Street strategists had pegged as the end of a multi-year steepening trend.
The flattening of recent months came as traders started to anticipate Fed liftoff from near-zero interest rates within the next couple of years. But the recent spread of the delta variant is raising uncertainty about the path of the economy, and thus Fed policy.
The Fed is now buying a combined $120 billion of Treasuries and mortgage-backed securities a month.