Bond Traders Cruise Into Wave of Data That May Shake Their World

  • Weekly range of 10-year Treasury yield falls to 18-month low
  • Inflation and jobs data vital to shaping investors’ outlook

Judging by the action over the past week in the $14 trillion Treasuries market, you’d never guess that traders are just days away from receiving crucial economic data.

Things haven’t been this quiet for the world’s biggest bond market in years. The five-day average true range of the 10-year U.S. yield, which takes into account the differences between intraday highs and lows, was the narrowest since November 2015 last week. The Merrill Lynch Option Volatility Estimate index, a gauge of expected price swings in Treasuries, fell to the lowest in almost three years.

Blame Monday’s Memorial Day holiday in the U.S. if you want. But, if anything, it just crams vital data on the economy into an even shorter period for traders to digest. Lately, underwhelming economic growth and unexpectedly weak consumer price increases have halted any sustained selloff in Treasuries, even though the Federal Reserve appears resolved to tighten monetary policy. 

The bond market is signaling policy makers will hike in June, pricing in about 80 percent odds. But bets on the Fed could be whipsawed as traders return to their desks, starting with Tuesday’s personal consumption expenditure index data, the central bank’s preferred gauge of inflation. Two days later traders get manufacturing survey results, and the week culminates with monthly payroll data, the bright spot of the economy. The figures will help set expectations for whether the Fed will raise rates as officials forecast in March.

“We’re cognizant of the risk of a tectonic shift in the interpretation of the current economic outlook,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. Given how quiet trading has been, “even a modest fundamental shift could trigger an outsized response in the Treasury market.”

Adding to the pressure-filled week, a handful of Fed officials are scheduled to speak in advance of the central bank’s self-imposed blackout period, which begins June 3. Before the March rate decision, their speeches left traders racing to adjust expectations, pushing the 10-year yield to its 2017 high.

For Bob Savage, chief executive officer of hedge fund CCTrack Solutions LLC, the bond market needs a reminder that the Fed is serious about raising rates. That could start with data affirming the view of Federal Open Market Committee members that recent weakness in inflation data will be transitory.

“Many people see the FOMC as promising to be late to the party and unwilling to take away the punch bowl of easy money,” Savage said on Thursday. 

He’s watching if the 10-year yield breaches 2.35 percent, the 55-day moving average. It closed at about 2.25 percent on Friday, little changed from where it started the week. Most of the rally came after minutes of the FOMC’s May 2-3 meeting revealed a plan to reduce the central bank’s balance sheet that was more dovish than traders expected.

Nevertheless, all 58 strategists surveyed by Bloomberg, except for Steven Major at HSBC Holdings Plc, say yields should go higher by the end of June.

Whether those expectations become reality could hinge on this week.

Here’s what to watch:

May 30PCE Deflator
PCE Core
Personal Income and Spending
Fed’s Brainard Speaks in New York
May 31Pending Home Sales
Fed Beige Book
Fed’s Kaplan Speaks in New York
Fed’s Williams Speaks in Seoul (June 1 local time)
June 1ADP Employment Change
Initial Jobless Claims
ISM Manufacturing
Construction Spending
Fed’s Powell Speaks in New York
June 2Change in Nonfarm Payrolls
Average Hourly Earnings
Unemployment Rate
Fed’s Harker Speaks
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