Bond traders’ wild ride to kick into overdrive


NEW YORKYou’ve traded on inflation data and the prospect of rising sovereign-debt supply.

You’ve wagered on US Federal Reserve (Fed) meetings and what the next chairman might do.

And you’ve bet on jobs and wage growth that exceed or miss targets. Now, try doing it all in one week.

With yields threatening to leap higher, bond traders will grapple this week with market-moving stimuli coming at breakneck speed.

The selloff in Treasuries less than a month into 2018 has already sparked calls of a bear market, including from Ray Dalio, founder of hedge fund Bridgewater Associates.

US domestic events are about to take centre stage, after decisions by the Bank of Japan and European Central Bank left 10-year yields close to the highest since 2014.

Traders will have a few things on their minds: Janet Yellen’s final meeting as Fed chair, the Treasury’s plan to cover widening deficits and, to cap it all off, an update on the US job market.

“It seems almost impossible how much is jammed into one week,” said Michael Lorizio, a senior trader at Manulife Asset Management, which oversees US$383 billion (RM1.48 trillion).

“The more responsible shorterterm trading rationale is rather than making a major shift in your investments, being willing to miss the first few basis points to have your longer-term thesis proven or disproven by the new data and information.”

Fed Leanings

This week could wind up bolstering the prevailing view — that yields are finally heading higher.

While the Fed is seen standing pat, some Wall Street banks are bracing for a statement on Jan 31 that comes off as “more hawkish” than last month’s, in part because of climbing inflation expectations.

The 10-year breakeven rate is the highest since 2014, signalling demand for protection against accelerating inflation.

Fed funds futures are pricing in more than 2.5 rate hikes by the central bank this year, close to policymakers’ forecast for three.

At the end of last week, options activity indicated growing interest in hedging against an extended selloff.

And then there’s supply. The Treasury is expected to unveil bigger note sales this week for the first time since 2009.

More issuance just as the Fed is trimming its balance sheet and has a green light from markets to keep raising rates? Sounds like a tough environment for bond investors.

To be fair, not everyone’s buying into the gloom.

Dimitri Delis, senior econometric strategist at Piper Jaffray in Chicago, points to the deteriorating US savings rate.

As a share of disposable income, it fell to 2.6% last quarter, the thirdlowest on record. That matters

because consumers make up about 70% of the economy.

“I don’t know what’s going to keep the consumer on the same pace as the last two years,” he said.

“I can probably string together events that can get us to 3% on the 10-year, but once it gets there, are the fundamentals there to support that level? I don’t think so.”

Then again, two months ago traders weren’t so sure that 10-year yields could break above 2.4%, and they’ve stayed above that level for five weeks.

The trend for months has been for yields to climb and consolidate, before breaking even higher.

Last week, bond traders appeared to catch their breath. They’ll need it for the sprint ahead. — Bloomberg