A 10-Day Test Is Coming for Bond Market Battered by Selloff

(Bloomberg) -- The US bond market, already stung by the worst selloff in six months, now heads into a crucial two-week stretch that will likely chart its course for the rest of the year. 

A series of market-moving events are coming in rapid succession, kicked off by the Treasury Department’s announcement Wednesday on the scale of its coming debt sales and by monthly payroll figures Friday that will show whether the economy is cooling enough to justify further interest-rate cuts.

That’s followed by even bigger ones next week: The Nov. 5 presidential election and, two days later, the Federal Reserve’s first meeting since it began easing monetary policy in September. 

“The risk really for the next few weeks is elevated,” said Alex Chaloff, chief investment officer at Bernstein Private Wealth Management.

Treasury prices have tumbled sharply over the past month as the continued strength of the economy casts doubt on how deeply the Fed will cut interest rates in the months ahead. The presidential election has added to the uncertainty, with some investors speculating that a victory by Donald Trump will push yields higher on anticipation that his tax cuts and tariffs would fan inflation pressures and keep rates elevated.

While the Fed started easing last month with a half-percentage-point move, traders jettisoned once-widespread forecasts that it would continue to cut swiftly after data signaled the economy is expanding at a relatively rapid pace. As a result, yields have jumped sharply, pushing up borrowing costs across markets and sending Treasuries toward the first monthly loss since April.

“It’s been such a momentous cycle so far — and a lot can happen in the next two weeks,” said Sinead Colton Grant, chief investment officer at BNY Wealth. 

That run of key news events is raising a risk that the selloff could gather some steam in the next few weeks, particular as investors position for fallout from the US election. In one sign of that, traders are paying the highest premiums this year for options that seek to protect portfolios against yield spikes. 

Yet some of the upcoming events may also be supportive of the bond market. The Treasury Department is expected announce that it’s keeping the size of its debt auctions steady in the upcoming quarter — averting any supply pressures — though traders will also be paying close attention to any signals on the future trajectory. 

The Fed’s preferred inflation measure — the personal consumption expenditure price index — is expected to show that price pressures are easing some and the Labor Department is expected to report a dip in the number of job openings. 

On Friday, the department is expected to report that US employers expanded payrolls by 110,000 workers in October, down from 254,000, according to economists surveyed by Bloomberg, though the numbers may be distorted by the impact of recent hurricanes and the strike at Boeing Co.

“Anything up to about 180,000 is just the magic number,” said Bernstein’s Chaloff, who sees anything below that as weak enough to support further Fed easing. A stronger print would see the central bank “have to think long and hard about what they do next.”

Other economic flashpoints over the next two weeks include the continued release of corporate earnings and a meeting of China’s most-powerful policymakers in Beijing, which could also roil markets keen for fresh efforts to buoy world’s second largest economy.

What Bloomberg strategists say...

Whether you prefer to focus on the macro or the micro, it will probably be a good idea to strap into your seat next week. Five of the Magnificent Seven report earnings from Tuesday to Thursday, and with Eli Lilly also announcing results that’s six of the 10 largest companies in the S&P delivering market-moving news. Add in PCE data and of course payrolls next Friday, and that’s a pretty potent cocktail of potential volatility.

— Cameron Crise, Bloomberg MLIV macro strategist. Read more here. 

When it comes to the US economy, though, there will be little guidance from the Fed itself with policymakers in traditional blackout period on public comments ahead of next week’s meeting. Swaps are pricing in a more than 80% chance that the Fed will cut rates by a quarter point on Nov. 7. But they also signal strong odds that it will hold steady at one of the next two meetings.

The Fed’s decision, however, may be drowned out by the presidential contest between Vice President Kamala Harris and Trump, especially if there’s uncertainty over the outcome. For the bond market, the bulk of the speculation has centered on the risk posed by a win by Trump, whose tax-cut and tariff plans could push yields up by fueling the deficit and increasing import costs.

“There seems to be some correlation between the 10-year yield and Trump’s path to victory,” said George Catrambone, the head of fixed income for the Americas at DWS Group. That “seems to be equaling higher yields.”

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