Bond Traders Eye Fedspeak Marathon to Confirm Hawkish Rate Tilt

  • Key is policy makers’ view on mysteriously low inflation
  • Market also watches Congress for votes on health, tax bills

The bond market is about to face a marathon of Federal Reserve speakers who could make or break traders’ move to embrace a December rate hike as practically a given.

In the wake of the central bank’s meeting last week, the market-implied odds of a December tightening surged above 60 percent, from a third of that earlier this month, as policy makers stuck to projections of another hike in 2017 and three more in 2018.

Yet traders also keyed on Chair Janet Yellen’s comment that stubbornly low inflation is something of a “mystery,” and they reacted by pushing the yield curve to the flattest in months. Officials will have more than enough opportunities in the days ahead to adjust market sentiment. New York Fed President William Dudley kicks the week off on Monday, and Yellen appears on Tuesday. A bevy of other U.S. central bankers are also on the docket.

“There is a Fed speakerthon,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities in New York. “It will be interesting to see what they focus on and how they paint inflation. We wouldn’t expect a huge shift in their near-term hawkish tone.”

With the Fed chair highlighting the puzzle of tame inflation, Wall Street dealers were stuck with an above-average share of last week’s auction of inflation-protected Treasuries. This week, investors will digest auctions of a combined $88 billion of two-, five- and seven-year notes. For two-year debt, yields are close to the highest since 2008.

Investors will also need to keep a close eye on Capitol Hill.

The Senate needs to act by Sept. 30 to use a fast-track procedure to keep Democrats from blocking a health-care proposal by Republicans Lindsey Graham of South Carolina and Bill Cassidy of Louisiana.

Any sign that Congress may advance the legislation would revive bets on an overhaul of the nation’s tax system and fuel anxiety about the potential for more Treasury supply on the back of rising deficits, TD’s Goldberg said.

At the end of last week, Senate Republican leaders were struggling to win support for what may be a last-ditch effort to repeal Obamacare.

The benchmark 10-year Treasury yield, at 2.25 percent, is coming off its second straight weekly increase. The spread between two- and 30-year yields tumbled to as narrow as 134 basis points, its slimmest since June, after the Fed in quarterly projections cut its peak rate outlook.

What to Watch

  • Yellen speaks at a luncheon Tuesday on topics such as inflation and uncertainty about monetary policy. A slew of her colleagues are also making public appearances, with the New York Fed’s Dudley kicking things off Monday and the Philly Fed’s Harker in the anchor position Friday.
  • For economic data, traders will focus on the release Friday of August personal income and spending figures, PCE deflator and core readings for August, as well as September’s Chicago purchasing managers and University of Michigan sentiment releases
    • Before that, there’s also: Aug. Chicago Fed national activity index and Sept. Dallas Fed manufacturing activity on Monday
    • Case-Shiller home price index for July on Tuesday as well as new home sales for August, Sept. consumer confidence and the Richmond Fed manufacturing index
    • MBA mortgage applications, Aug. durable goods and pending home sales, jobless claims, 2Q GDP, Aug. wholesale inventories, Bloomberg Consumer Comfort index slated for Wednesday and Thursday
  • The Treasury’s auction schedule includes a solid dose of supply
    • Three- and six-month bills will be sold Sept. 25, with 4-week bills offered on Sept. 26
    • $26 billion two-year notes, $34 billion five-year notes, and $28 billion seven-year notes to be sold on Sept. 26, 27 and 28, respectively
  • Traders are also monitoring geopolitical tensions as North Korea’s leader and U.S. President Donald Trump trade threats
    Before it's here, it's on the Bloomberg Terminal.