Powell has bond traders right where he wants them: Full of doubt
Powell has the bond market exactly where he wants it: lacking conviction as to the Federal Reserve’s next steps.
It’s a scenario — evident in part through split futures positioning — that gives the Fed chair and his colleagues leeway to quickly adjust policy in the coming months as economic data unfolds, without having to fret about potentially roiling the world’s biggest fixed-income market.
Powell said in a Friday speech in Wyoming that the central bank is ready to tighten again if needed to tame inflation. For investors, it means that reports like the monthly jobs data out next week will be crucial, and that it will be tough to crown a winner in the battle between the bond bulls and bears any time soon, even with Treasuries poised for four straight months of losses.
Powell has “retained maximum policy optionality,” Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, told Bloomberg Television.
The 10-year yield ended the week a bit above 4.2%, after touching 4.36% during the week, the highest since 2007. US Treasuries have lost 1.3% this month through Thursday, leaving them down slightly for 2023, according to a Bloomberg index.
Two Camps
There’s still plenty of debate over how to approach the bond market almost 18 months after the Fed kicked off its tightening campaign.
Some of the world’s biggest money managers, including JPMorgan Asset Management and TCW Group, see an opportunity to boost bullish wagers with benchmark yields probing higher. It’s a camp that expects the Fed’s cumulative tightening and the roughly half-point leap since June in 10-year yields will spark a recession and make rate cuts inevitable in 2024.
Meanwhile, with inflation proving sticky and the US ramping up
