Bond Traders Follow Fed’s Lead With No Let-Up in Inflation Fight

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(Bloomberg) — Bond traders are learning to follow the oldest rule in the book: don’t fight the Fed. 

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While Treasury yields have seen periodic pullbacks on hope the central bank will ease up on its rate hikes, they have been short-lived as central bank officials stick to their hawkish script. On Friday, a fresh round of selling broke out after the monthly jobs report showed that the unemployment rate unexpectedly fell as payrolls continued to expand at a solid pace. 

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That labor-market strength is likely to keep the Fed on track to continue with its most aggressive monetary policy tightening in decades, even if Thursday’s consumer price index report shows some slight easing in inflation pressures. Central bank officials have made it clear that they are determined to stay on course until they rein in inflation that still remains well above their 2% target. 

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The jobs data was “a slight disappointment relative to hopes that this report would give a piece of evidence in favor of the camp that there’s a slowdown and a pivot underway,” Jeffrey Rosenberg, BlackRock Inc.’s senior portfolio manager said on Bloomberg TV Friday. But “next week we’ll get the most important report, which is the CPI report” given the concern of some that “we are in a wage-price spiral.”

The bond market’s relentless rout has hit Treasury investors with a loss of around 13% this year and pushed two-year yields to about 4.3%, just shy of the 15-year high hit last month. With the stock market also under pressure, investors recently poured the most into cash since April 2020, according to Bank of America Corp.

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Others have started to buy bonds again, wagering that yields are high enough to buffer the hit of any price declines. Such buying has also been fueled periodically by speculation that the Fed will stop short of where the markets now expect, either because of a drastic slowdown in the economy or turmoil in financial markets. The futures markets are currently pricing in that the Fed’s key rate will peak in a range of 4.5%-4.75% in March.

Bill Gross, the former chief investment officer of Pacific Investment Management Co., and DoubleLine Capital Chief Executive Officer Jeffrey Gundlach are among those who have expressed bullish views. Scott Minerd, global chief investment officer at Guggenheim Investments, said severe strains in financial markets are likely to be the key to when the Fed finally reverses course.

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Read more: Bill Gross Sides With Pimco Bond Bulls in Seeing Yields Peaking

But bond bulls have been burned before by seeking to call the market’s bottom, only to see yields keep moving up in the face of persistently high inflation. 

On Thursday, economists expect the Labor Department to report that the core consumer price index, which excludes volatile food and energy prices, in September accelerated to an annual jump of 6.5% from 6.3% in August, though the month-to-month measure is expected to slow. Overall, the CPI is expected to be up 8.1% year-on-year, down only slightly from the month before. 

“Markets are incredibly sensitive to CPI prints as there is a tug of war in the bond market over whether the Fed has does enough tightening or needs to be more hawkish,” said Eric Stein, chief investment officer, fixed income, at Morgan Stanley Investment Management.  

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“The Fed will need to see multiple inflation reports before they are certain they have it under control while forward-looking markets will anticipate the outcome,” he said. “The only answer markets want to know is what will the inflation number be a year from now.”

What to Watch

• Economic calendar
  • Oct. 11: NFIB small business optimism
  • Oct. 12: PPI; MBA mortgage applications
  • Oct. 13: CPI; jobless claims
  • Oct. 14: Retail sales; Import and Export price index; U. of Mich Sentiment and inflation expectations
• Fed Calendar:
  • Oct. 10: Chicago Fed President Charles Evans; Fed Vice Chair Lael Brainard
  • Oct. 11: Cleveland Fed President Loretta Mester;
  • Oct. 12: Minneapolis Fed President Neel Kashkari; FOMC meeting minutes from September; Fed Governor Michelle Bowman
  • Oct. 14: Fed Governor Lisa Cook
• Auction calendar:
  • Oct. 11: Three-year note; 13-, 26-week bills
  • Oct. 12: 10-year note
  • Oct. 13: 30-year bond; 4-, 8-week bills