The yield curve has just posted its first week of steepening since July, rebounding from its flattest level in a year after a much-anticipated speech by Federal Reserve Chairman Jerome Powell. He pointed out that the central bank could start slowing down its debt purchases in 2021, although it won’t rush to start raising rates afterwards.
He also expressed caution about the rising delta variant, leaving traders to focus on August employment data to assess which of the three remaining 2021 policy meetings the Fed might be confident enough to reveal its plans for. reduction. Against this backdrop, robust employment figures on September 3 could prolong the steepening trend by fueling bets that will become scarce sooner rather than later.
Powell did an exceptional job of trying to separate the requirements and the cutoffs as being very different – saying there was a much stricter test for rate hikes, ”said Gene Tannuzzo, portfolio manager at Columbia Threadneedle, in a telephone interview. “So I think if this is better than expected data thanks to this delta increase and the tapering that is happening, the yield curve could steepen.”
The median projection is for an addition of 750,000 jobs in August, compared to a gain of 943,000 in July. A higher than expected August figure will likely put the 10-year yield on track towards 1.5% or more, Tannuzzo said, down from around 1.3% now.
It can also offer traders an explosion of volatility. The ICE BofA MOVE index – which tracks implicit movements in treasury bill prices – is hovering around its average for 2021, after Powell’s speech on Friday did not cause much turmoil.
The yield curve, measured by the spread between 5 to 30 year rates, is around 111 basis points. It flattened from a peak of 167 basis points reached in February in 2021 – an inflection point some Wall Street strategists had called the end of a multi-year steepening trend.
The flattening of the past few months has come as traders begin to anticipate the Fed to take off from near zero interest rates over the next two years. But the recent spread of the delta variant increases uncertainty over the path of the economy, and therefore over the Fed’s policy.
The Fed is now buying a combined $ 120 billion worth of treasury bills and mortgage-backed securities per month. When it unwound its quantitative easing program put in place in the aftermath of the 2008 financial crisis, it took 10 months to complete the reduction. The central bank announced its plans in December 2013 and began cutting back on monthly purchases the following month.
“People will come back on Monday with the opinion that the Fed is almost unanimous on the coming cut,” said Vineer Bhansali, founder of asset manager LongTail Alpha. “The bond market will recalibrate and we will start to see a liquidation of the Treasury market.”
What to watch
The economic calendar:
August 30: Sales of houses on hold; Dallas Fed Manufacturing
August 31 : FHFA house price index; S&P CoreLogic home prices; Chicago MNI PMI; Conference Board Consumer Confidence
September 1st : MBA Mortgage Applications; ADP employment; Markit manufacturing PMI; construction expenses; ISM Manufacturing
September 2: Job cuts at Challenger; non-agricultural productivity; unemployment benefit claims; trade balance; Langer consumer comfort; factory orders / durable goods / capital goods
September 3: non-farm wages; Markit PMI services; ISM Services
The Fed’s timeline:
September 1st : Raphael Bostic of the Atlanta Fed
September 2: Bostique
The auction calendar:
uh. 30 : Invoices 13, 26 weeks
August 31 : CMB 21 days
September 2: Invoices 4, 8 weeks