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Bloomberg
Bond market ‘chicken game’ with Fed ready to take stock
(Bloomberg) – Investors are reassessing one of the main trades of bond market reflation – the steepening of the curve – once again as growth and inflation expectations improve at a pace hard to imagine ago barely a few months. the idea was that the Federal Reserve could squeeze long-term Treasury yields, the problem now lies with shorter-term rates – the 5-year rates. Yields to that maturity have entrenched in recent weeks, rising amid speculation the central bank will have to begin a cycle of rate hikes perhaps a year earlier than officials have indicated. This shift has shaken the prospects for a classic iteration of the reflation bet, a widening spread between 5 and 30 year yields, even as the narrative of a stimulus-fueled recovery has only gotten worse. magnitude. a steeper curve is not kaput because yields are still generally considered to increase further. We just have to rethink. For example, this may mean abandoning the bet if it is based on the 5-year note, which reflects a medium-term view of the Fed’s trajectory, in favor of a bet based on the 2-year, which still remains anchored. in the eyes of the market. . This backdrop only heightens attention to the Fed’s March 16-17 meeting, officials’ next chance to counter speculation that tightening will begin as early as the end of next year. market expectations or allow them to hold, ”said Kevin Walter, Co-Director of Global Treasury Bill Trading for Barclays Plc. Without the Fed pushback, he said, “there could be more pressure on the belly of the curve,” in which case the best would be the spreads between 2-year yields and 5-year rates. and 7 years that could increase as traders tighten. The swap market reflects a roughly 75% chance that the Fed will hike rates near zero around the end of 2022. Walter does not expect any major policy changes next week and expects officials to continue to project rates suspended until 2023. The first half of 2022 and the 5-year 1-year rate could rise by 50 basis points, Peter Chatwell, head of multi-asset strategy at Mizuho International Plc, said in an email . A nod last week to the collapse in the bond market which pushed 10-year yields above 1.6%. He stressed the importance of financial conditions, which remain accommodative, although tech stocks fell on Friday with surging yields. Five-year inflation expectations at their highest since 2008 and strong jobs data n ‘only strengthened bets that the Fed will have to tighten faster. what he planned. Speculation put bets on a steeper 5-30 year curve, narrowing the spread to just above 150 basis points, from an over 6-year high of 167 in February. The 5-year yield at 0.84% is not far from its highest level since last year, but the 2-year rate has remained close to its all-time lows with the expectation that the Fed will hold its rates close to zero in the immediate future. This kept bets on the widely watched spread against the in-game 10-year rate, as well as against other maturities, such as 5 and 7 years. Chief Market Strategist for Incapital. He expects the 2-10 year spread to continue to widen, but has taken profits on the slopes and is looking for a better point to re-enter. TD Securities recommended entering this bet at 146.5 basis points, targeting 170, based on what it said was a high bar for bulls and the prospect of a high coupon supply. belly, as it is seen as one of the places likely to bear the brunt of any further selling if speculation on rate hikes escalates. Some corners of the market are already turning their attention to the potential for rate hikes. multiple. According to a Barclays analysis, a position has emerged aimed at pushing the Fed up seven to eight times by March 2025, and while the sale of Treasuries has been in vogue, “it’s possible the market has taken a little ahead of itself. belly, “causing the 5-year rate to rise too sharply,” said Jamie Anderson, head of US trading for Insight Investment, which manages around $ 1 trillion. The belly should rally and the curve should straighten, “said he said. For Incapital’s Leary, the narrowing of the 5s30s spread came from the point of view that officials could discuss – or even announce – a twist next week. Such an operation, involving the sale of securities maturity and buying longer maturities to control yields would put more pressure on the stomach, he said. This would follow the European Central Bank’s decision to step up its pace of buying. bonds. “All of these transactions depend heavily on sidelining the Fed and keeping its policy as it is,” Leary said. “The market is definitely playing a pool game with the Fed, testing how yields can be high before t tighten financial conditions and force the Fed to intervene. ” THINGS TO LOOK FOR Economic calendar: March 15: Empire manufacturing; International treasury of capital flows March 16: import / export prices; retail sales; industrial production; business inventories; NAHB housing market index March 17: inquiries MBA Mortgage Loan; Building Permits; Housing Starts; FOMC Decision March 18: Jobless Claims; Philadelphia Fed Business Outlook; Consumer Comfort Langer; indexFed Calendar: March 17: FOMC Decision; Powell Press Auction Schedule: March 15: 13, 26 week bills March 16: 42 day cash management bills; 20 year bonds March 18: 4 to 8 week bills; 10 year TIPS
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