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Volatility in the $27tn US Treasury market has surged to its highest level since the start of the year, as nervy investors quickly readjust their expectations for how quickly the Federal Reserve will cut interest rates.
Stellar jobs numbers on Friday sparked one of the biggest daily swings in bond yields this year, as investors pencilled in a slower pace of rate cuts. The 10-year yield, which had been falling since late April, jumped 0.13 percentage points on the day as prices fell, and is now trading above those levels at about 4.02 per cent.
Investors are now bracing for potential further volatility on Thursday when US consumer price inflation data is released.
The payrolls number was a “shock to the system” for investors who had taken a dim view of the strength of the US economy, said Craig Inches, head of rates and cash at Royal London Asset Management.
“If we see a small miss to the downside on CPI tomorrow then I think the rally in Treasuries could resume,” he said. “By contrast, a strong inflation number would likely see a very sharp re-rating of interest rate expectations, and call into question the ability for the Fed to cut further in 2024.”
The Ice BofA Move index, a gauge of bond investors’ expectations of future volatility in the Treasury market, jumped on the jobs data to its highest level since January and has remained elevated.
“Because the Fed has been data-dependent, [for] every economic number, you have this volatility risk,” said Leslie Falconio, head of US taxable fixed income strategy in UBS Asset Management’s chief investment office.
The jobs data dashed investor hopes of a half-percentage point cut at the Fed’s November meeting. Investors are now expecting two quarter-point cuts by the end of the year, according to swaps markets.
“We’re not out of the woods yet,” said Jeffrey Sherman, deputy chief investment officer at asset manager DoubleLine, in a webcast on Tuesday, adding that there was “going to be some noise” coming from labour and inflation market data.
New York Fed president John Williams told the Financial Times this week that the central bank was now “well positioned” to pull off a soft landing for the US economy. But decisions would hinge on the data, rather than following a “preset course”, he said.
Economists are forecasting a slight fall in annual consumer price inflation to 2.3 per cent in September when figures are published on Thursday.
But there could be a “knee-jerk reaction” if it comes in substantially higher, said UBS’s Falconio.
DoubleLine’s Sherman said “things could fall apart if we decide to all save money and we don’t want to consume any more”.
He added: “But right now, it sure feels like, as we end 2024, that the US economy is still in a decent spot.”
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