Treasuries are like a coiled spring ahead of the Federal Reserve’s long-awaited Wyoming confab, with traders showing less conviction than they have in months about the market’s next move.
Benchmark yields finished this week little changed from seven days earlier, even after a stretch that saw a record-breaking 10-year auction, the lowest consumer-sentiment reading in a decade and another elevated inflation figure. JPMorgan Chase & Co. client data sum up the market’s stance perfectly: The number with a neutral position on Treasuries hasn’t been higher since February.
Traders are now looking to the Fed’s Aug. 26-28 symposium in Jackson Hole, an annual event that’s been the setting for important announcements in the past. For months, the fixed-income market has viewed it as a potential venue for Fed Chair Jerome Powell to lay out the timing and contours of the central bank’s expected move to taper its bond-buying programme, although for some the resurgence of coronavirus cases is complicating that calculation.
“We would all like to think that Jackson Hole will provide some clarity, because there is precedent for signaling policy actions at this venue,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co. “The pathway of the delta variant and the virus generally looks like it will play a part in when Chair Powell chooses to signal FOMC intentions. If cases are still rising, he will have to shape the contour of his message to that reality.”
Ahrens says his clients have “more cash than they would like.” He’s seeing them put money to work, “but rather than shoveling cash into the market, they are taking more of a pitchfork approach.”
The bounce in 10-year Treasury yields from a six-month low following stronger-than-expected July payrolls figures appears to have ground to a halt with the rate settling in the neighborhood of 1.3%. Treasuries gained Friday after a University of Michigan survey showed the weakest consumer confidence since 2011 amid surging coronavirus cases.
Even as lawmakers work to advance a mammoth package of infrastructure spending that could boost economic growth, there are signs of robust demand for Treasuries. This week’s auction of 10-year notes attracted unprecedented buying from indirect bidders, a category seen as a proxy for international central bank purchases.
Traders want to hear more from the Fed on when it will reduce its $120 billion of monthly bond purchases. The release next week of the minutes of the Fed’s July meeting will provide further clues on how the debate was shaping up before Jackson Hole.
In a research note titled “Jackson Hold,” Bank of America Corp. strategists said Treasuries have tended to rally into the symposium, but then wound up little changed in the two weeks after the event.
“Similar price action this year would not surprise us,” strategists including Mark Cabana wrote Friday. “Powell is expected to deliver a speech that recounts U.S. economic progress since the pandemic and acknowledges the FOMC will continue debating taper but fall short of signaling it.”
What to Watch
The economic calendar:
Aug. 16: Empire manufacturing; Treasury International Capital flows; mortgage delinquencies
Aug. 17: Retail sales; industrial production; business inventories; NAHB housing index
Aug. 18: MBA mortgage applications; building permits; housing starts; FOMC minutes
Aug. 19: Jobless claims; Philadelphia Fed business outlook; Langer consumer comfort; leading index
The Fed calendar:
Aug. 17: Powell town hall with educators; Kashkari town hall on economy
Aug. 18: FOMC minutes
The auction calendar:
Aug. 16: 13-week bills
Aug. 18: 20-year bonds
Aug. 19: 4-, 8-week bills; 30-year TIPS