Bond traders learn to follow the oldest rule in the book: don’t fight the Fed.
While government bond yields have seen regular pullbacks on hopes that the central bank will ease its rate hikes, they were short-lived as central bank officials stuck to their dovish script.
A new round of selling erupted on Friday after the monthly jobs report showed the jobless rate fell unexpectedly as payrolls continued to grow at a solid pace. This jobs strength is likely to keep the Fed on track to continue its most aggressive monetary tightening in decades, even if Thursday’s CPI report shows some easing in inflationary pressures. Central bank officials have made it clear that they are determined to stay the course until they rein in inflation, which is still well above their 2% target.
The jobs data were “a slight disappointment compared to hopes that this report would provide evidence for the camp that a slowdown and reversal point is underway,” Jeffrey Rosenberg, BlackRock’s senior portfolio manager, said on Bloomberg TV on Friday . But “next week we get the most important report, which is the CPI report”, amid concern from some that “we are in a wage-price spiral”.
The bond market’s unrelenting flight has hit Treasury investors down about 13% this year, pushing two-year yields down to about 4.3%, just below the 15-year high hit last month. With the stock market also under pressure, according to Bank of America Corp. most invested in cash since April 2020.
Others have started buying bonds again, betting that yields will be high enough to cushion the impact of any price declines. Such buying has also been regularly fueled by speculation that the Fed may be close to where markets are now expecting it to be, either due to a sharp slowdown in the economy or turbulence in financial markets. Futures markets are currently pricing in that the Fed’s interest rate will peak in March in a range of 4.5% to 4.75%.
Bill Gross, the former chief investment officer of Pacific Investment Management Co., and Jeffrey Gundlach, chief executive officer of DoubleLine Capital, are among those who have expressed optimistic views. Scott Minerd, global chief investment officer at Guggenheim Investments, said severe tensions in financial markets will likely be key to when the Fed finally reverses course.
But bond bulls have been burned before, trying to call the market’s bottom, only to see yields continue to rise amid persistently high inflation.
“Markets are incredibly sensitive to CPI data as the bond market is in a tug-of-war over whether the Fed has tightened enough or needs to tighten,” said Eric Stein, chief investment officer, fixed income, at Morgan Stanley Investment Management. “The Fed needs to see multiple inflation reports before being sure it has it under control, while forward-looking markets will anticipate the outcome,” he said. “The only answer markets want to know is what the inflation figure will be a year from now.”
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