Bond, FX Traders Back at Square One in Volatile Open to 2017

  • There’s been a lot of noise on the path to little changed
  • BMO Sees ‘meaningful test’ of overseas demand in Treasury sale

If bond and currency traders didn’t have a post-New Year’s Eve hangover, they might just have a splitting headache now.

This is supposedly the year of reflation and three Federal Reserve interest-rate hikes -- a notion bolstered by the FOMC minutes release on Wednesday. And yet, U.S. Treasury yields fell the next day by the most since after the Brexit vote, and the dollar’s rally came to a screeching halt. Then the move almost entirely reversed on Friday after a jobs report that, while missing expectations on the headline number, was viewed as solid enough to keep the Fed’s plans intact. 

That left 10-year Treasury yields down a mere three basis points on the week, at 2.42 percent. The Bloomberg Dollar Index fell less than 0.1 percent. So much for that reality check.

Some of the biggest names on Wall Street chimed in, adding to the noisy path to little changed. Mohamed El-Erian, Allianz SE’s chief economic adviser, said investors shouldn’t overlook risks tied to the strengthening dollar, echoing the concerns of some Fed officials. El-Erian’s old boss, Bill Gross of Janus Capital Management, raised the specter of a bond bear market if 10-year yields climb back to their highs from last month. (He also invoked Italian dictator Benito Mussolini with regards to Trump’s targeting of corporations to make them change their practices, but that’s neither here nor there.)

Take your headache pills. 2017 has just begun.

What to watch into next week:

  • The Treasury market will get a “meaningful test of overseas sponsorship” in next week’s auctions, BMO Capital Markets says
    • U.S. to sell $24 billion of 3-year notes on Jan. 10, $20 billion of 10-year notes on Jan. 11 and $12 billion of 30-year bonds on Jan. 12
    • Biggest foreign buyers of Treasuries have been retreating after years of absorbing record amounts
  • Speaking of big overseas buyers of Treasuries: China releases inflation and trade balance data; given the yuan rally, any outsized swings may spill over into Asia FX and then G-10 FX
  • Traders expect longer-term players to re-enter FX markets in the coming weeks; whether or not they step in to buy dollar will be of interest
  • President-elect Donald Trump holds a press conference on Wednesday, which FX traders will be watching for any comments on trade, tariffs and relations with China. Currency market volatility and central bank action to support the peso (directly) and the yuan (indirectly) were partly responsible for Thursday’s decline in Treasury yields.
  • In U.S. economic data: small business optimism, wholesale inventories, import price index
  • It’s no jobs day, but to cap the week, the Census Bureau will release retail sales data for December on Jan. 13
    • TD Securities and Credit Suisse both expect a strong gain of 0.7 percent, compared with 0.1 in November and the median forecast of 0.5 percent; TD cites boost from auto sales and positive holiday shopping reports
  • Among the Fed speakers on tap: Rosengren and Lockhart on Jan. 9; Harker, Evans, Lockhart (twice), Bullard, Kaplan and Yellen on Jan. 12; Harker again on Jan. 13
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