With some U.S. bond yields jumping to more than a decade highs last week, investors’ focus has begun to shift to what’s next at the Federal Open Market Committee’s July meeting.
Bond markets have now almost fully priced in a 0.25-point rate hike at the 25-26 FOMC meeting on the latest economic data.
‘Green light’ for US interest rate hike in July, wage growth accelerates contrary to FOMC forecast
So the focus has shifted to the September meeting, but investors are still divided. This week’s inflation data could be a key indicator, but even if a slowdown is confirmed, the need for further action at that point will remain unclear.
The delay between the July and September meetings, and the fact that it coincides with the summer holiday season, will likely add to the bond market’s volatility. The ICE-BofA-MOVE index, which measures bond market volatility, posted its biggest gain since early March on Wednesday. Two- and five-year bond yields soared to levels not seen since 2007.
Ray Remy, co-head of fixed income at Daiwa Securities Capital Markets America Inc. (DCMA), said volatility will remain high due to uncertainty about the future of U.S. monetary policy. “Given the jobs data, the economy is still strong and inflation is persistent, so there is room for bond yields to rise,” he said.
Bond market volatility is expected to remain high (ICE, BofA, MOVE indices)
Others, such as Morgan Stanley, dispute this view. Inflation is slowing, and the pressure on the Fed to raise interest rates is expected to ease after this month.
According to the US consumer price index (CPI) statistics for June, which will be released on the 12th, the core index (excluding food and energy, which fluctuates greatly) rose by 5% compared to the same month of the previous year, slowing down to the lowest level since November 2021. It is expected that
TD Securities expects the core index to fall to 4.8%. Moreover, the signs of a slowdown in the June jobs report are likely to persist, with strategist Gennady Goldberg at the firm saying, “It will be much harder for the Fed to raise rates after the July meeting.” . But he said he would keep the possibility of a rate hike in the fall to prevent the market from pricing in the possibility of a rate cut.
However, in between the two meetings, Powell will give a speech at the Jackson Hole meeting (an annual symposium hosted by the Kansas City Federal Reserve Bank) in August. Previous Fed chairmen have a history of delivering market-moving monetary policy outlooks at the meeting.
Original title: Bruised Bond Investors Face Long Road Beyond Fed’s July Decision(excerpt)
2023-07-09 14:51:12
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