Financial basis

Thwarted bond bears see spark for higher yields in pivotal week

(Bloomberg) – Bond bears, long frustrated with stubbornly low Treasury yields, are gearing up for a watershed week as the Federal Reserve is expected to start laying the groundwork to cut stimulus.

The bond market enters this potentially crucial period at a crossroads: 10-year yields have been testing the upper end of their range since early July, with traders anticipating that the Federal Open Market Committee will allude in its Sept. 22 decision to a plan aimed at curbing its obligation. purchase.

For the bearish contingent, majority on Wall Street, this meeting represents one of the last potential triggers this year of a decisive break in rates. Primary dealers polled by Bloomberg News predict on average that 10-year rates will be more than 30 basis points higher by the end of the year.

The weakening signals from the Fed are hardly the only target. Strategists also see probable ammunition for bears in the central bank’s new forecast for its benchmark rate. An unexpected hawkish change to those projections in June rocked financial markets and flattened the yield curve the most since the early days of the pandemic.

“I think the September FOMC will be a potential catalyst to push things forward towards higher yields by the end of the year,” said Blake Gwinn, strategist at RBC Capital Markets, who expects this. that 10-year yields hit 1.75% next time around. trimester. “If that doesn’t materialize, I’m not sure any other catalyst will get us there, and we could be stuck in range-linked trading in Q4.”

The average forecast from a Bloomberg survey of primary traders is that 10-year benchmark yields will climb to 1.69% by the end of the year, from just under 1.4% now. Deutsche Bank AG was the most bearish, forecasting 2.25%. Steven Major of HSBC Holdings Plc, known for his lingering bullish views, had the lower forecast, at 1%. The Fed is expected to hint on Wednesday that it is ready to cut soon with an official announcement coming in November, according to another Bloomberg survey of economists. The central bank is also expected to keep rates close to zero until 2022 before making two quarter-point increases in 2023 and three more the following year.

The risk is that a hawkish change in the Fed’s projections, known as the “dot plot”, will cause traders to recalibrate expectations about central bank policy, as happened in June. It will only take three officials to increase their points for 2022 for a full hike to be the new median for next year, assuming everyone keeps their forecasts where they were. Such a scenario would leave 5- and 10-year Treasury bills particularly vulnerable to a massive sell-off, according to Subadra Rajappa, head of US rate strategy at Societe Generale.

Expectations of such a shift have already helped reduce the 5- to 30-year rate spread to the lowest since August 2020, when the Fed unveiled its new inflation framework. On options, bets emerged Friday on even higher 5-year yields. “The points for next week’s meeting are going to be very important, not only for 2024 but also for 2022,” said Rajappa, who sees 10-year yields at 1.7% at year-end. “We believe this is an undervalued risk and bodes well for our call for higher returns.”

What to watch

The Economic CalendarSept. 20: housing index NAHBept. 21: Building permit; current account balance; Housing Starts Sep 22: MBA Mortgage Applications; Sales of existing homes; Decision of FOMCSept. 23: Chicago Fed national activity index; unemployment benefit claims; Langer consumer comfort; Markit PMI; advanced index; the manufacturing activity of the Kansas City Fed; Change in Household Net Worth Sep 24: New Home Sales The Fed Calendar Sep 24. 22: FOMC decision and press conference by Fed Chairman Jerome Powell, Sep 24: Loretta Mester of the Cleveland Fed; Powell, Governor Michelle Bowman and Vice President Richard Clarida host the Fed Listens event; Kansas City Fed Esther George Auction Schedule: Sep 20: 13- and 26-week bills Sep 21: 20-year bonds Sep. 22: 2-year floating rate bonds Sept. 23: invoices for 4, 8 weeks; ADVICE 10 years

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