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 flattest 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 Sept. 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% or higher, Tannuzzo said, from about 1.3% now.
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- to 30-year yields, is around 111 basis points. It’s flattened 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. When it unwound its quantitative easing program introduced in the aftermath of the 2008 financial crisis, it took 10 months to complete the paring down. The central bank announced its plans in December 2013 and began reducing monthly purchases the following month.
“People are going to come back on Monday with the view that the Fed is almost unanimous on tapering coming,” said Vineer Bhansali, founder of asset manager LongTail Alpha. “The bond market is going to recalibrate, and we’ll start seeing a Treasury market selloff.”
What to Watch
The economic calendar:
Aug. 30: Pending home sales; Dallas Fed manufacturing
Aug. 31: FHFA house price index; S&P CoreLogic home prices; MNI Chicago PMI; Conference Board consumer confidence
Sept. 1: MBA mortgage applications; ADP employment; Markit manufacturing PMI; construction spending; ISM manufacturing
Sept. 2: Challenger job cuts; nonfarm productivity; jobless claims; trade balance; Langer consumer comfort; factory/durable goods/capital goods orders
Sept. 3: Nonfarm payrolls; Markit services PMI; ISM services
The Fed calendar:
Sept. 1: Atlanta Fed’s Raphael Bostic
Sept. 2: Bostic
The auction calendar:
ug. 30: 13-, 26-week bills
Aug. 31: 21-day CMB
Sept. 2: 4-, 8-week bills