(Bloomberg) -- A tumultuous week for global bond markets headed toward calm as angst over a potential US economic downturn — which spurred a Treasury rally and brief market meltdown — faded.
The yield on benchmark US 10-year notes has returned to levels seen before last week’s US labor-market report, wiping out most of the steep declines from early this week. Traders have also pared back expectations for aggressive and super-sized interest-rate cuts from the Federal Reserve.
Globally, a return of risk appetite as the week wore on curbed investors’ appetite for bonds across Europe, mirroring the pattern with Treasuries.
The week’s wild swings underscore the jitters in the market as investors try to calibrate the timing and pace of rate cuts. Economic data was once again a key driver in that quest in the US, with the July employment data triggering a rally a week ago and weekly jobless claims on Thursday fueling a selloff.
Trading volume in Treasuries amounted to over $1 trillion for each of the seven trading days through Aug. 8, a record string of such outsized levels, according to Coalition Greenwich data.
The next test will come with inflation data. Traders will look for readings of producer and consumer price indexes on Tuesday and Wednesday to confirm that inflation is still ebbing, supporting the case for Fed rate cuts as soon as next month.
“If you kind of forget the noise early in the week, this seems like the right place to settle in,” Bryan Whalen, chief investment officer and a generalist portfolio manager at TCW Group, said on Bloomberg Radio. “It’s a nervous market.”
Ten-year yields, which slumped as low as 3.67% earlier this week, traded near 3.94% on Friday. Policy-sensitive two-year securities saw their yield this week rise 15 basis points to 4.03%. On Friday, shorter-maturity yields edged higher as longer-dated rates rose.
A trio of auctions this week showed stronger investor appetite for shorter-dated bonds. A $58 billion sale of three-year notes was met with decent demand, while bids were weaker for new 10- and 30-year securities.
Elsewhere, bond yields in Europe were also ended the week higher. The yield on 10-year German debt was up 5 basis points, while the rate on equivalent UK securities was 12 basis points higher than last Friday’s close.
Timing the Fed
The Fed’s September policy meeting is seen by swaps traders as the most likely moment for the first rate cut, with about 38 basis points worth of easing priced into contracts that cover that date.
While that still signals some expectations for a half-point reduction next month, it’s a large pullback from pricing on Monday, which indicated multiple super-sized cuts this year — or even a move between scheduled meetings. Traders now see about 100 basis points of easing for the year.
“Markets will remain worried about the risk of a 50-basis-point cut in September and inter-meeting cuts, though the pricing for both has receded significantly from recent highs,” TD Securities rate strategists including Gennadiy Goldberg wrote in a note. “A faster pace of Fed rate cuts also remains a worry.”
TD expects the Fed to cut rates by 25 basis points at each meeting starting in September until rates reach the so-called neutral level of 3% by late 2025. That should result in yields on benchmark 10-year notes falling to 3.4% by year-end and 3% by 2025, according to TD.
What Blomberg strategists say...
“Despite recent market volatility, there is insufficient evidence to suggest that the US economy is in a recession now. The Federal Reserve is more likely to opt for a quarter-point interest-rate cut next month than the 50 basis points investors are anticipating.”
— Nour Al Ali, macro markets. Read more on MLIV.
A large majority of economists surveyed by Bloomberg, meanwhile, expect only a quarter-point decrease in interest rates coming in September.
To Boston Fed President Susan Collins, the Fed could soon start easing rates as long as inflation continues on its downward path amid a strong labor market. On Thursday, Richmond Fed President Thomas Barkin said he’s optimistic that data will show inflation continuing to retreat in the coming months, but that policymakers have time to assess whether the economy is normalizing.
The central bank symposium later this month in Jackson Hole, Wyoming, will also provide an opportunity for Chair Jerome Powell to fine-tune his message to the market on monetary policy.
--With assistance from Liz Capo McCormick.
(Updates with prices, comments and European yields.)
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