Bond traders focus on inflation fight amid Omicron fear

by BLOOMBERG

NEW YORK • Bond investors ended a tumultuous Thanksgiving week with a reminder that Covid, not just the degree of US Federal Reserve (Fed) hawkishness, is still able to stir up markets around the globe. 

But after the dust kicked up by the latest worrying Covid variant news settles down, US Treasuries market look most likely to be driven 

by this: The central bank fighting inflation in 2022 by getting more restrictive with monetary policy. 

The Omicron virus strain’s emergence sparked a dramatic Treasuries rally last Friday as traders rushed to push back the timing of a 2022 rate hike to September from June. 

There was an 18-basis-point yield drop in five-year US debt, which has long been a barometer of future Fed shifts, and the 10-year fell below 1.5%. 

The abrupt slide in yields was a testament to how one-sided sentiment had become, leaving the bond market at the mercy of a sudden pandemic plot twist. 

The bond market has also heard from a growing number of Fed officials before Thanksgiving that a faster pace of tapering the central bank’s asset purchases may be war-ranted in the months ahead. 

“With the likes of the Fed and Bank of England already behind the curve, it is unlikely that the new variant will change their direction of travel at this stage,” said Leandro Galli, senior portfolio manager at Amundi Asset Management. 

Heading into December, the market can expect no easing in volatility as more details about the Covid variant emerge. However, the current macro story will also dictate sentiment. 

Markets will also be on watch for clues from Fed chairman Jerome Powell, who is set to testify before Congress in the coming week, and a slew of other central bank speakers.