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The Bond-Market Comeback of 2023 Is Heading to First Big Test


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(Bloomberg) — The bond-market’s bulls are poised for the first major test of 2023.

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Treasuries rallied this month on widespread anticipation that the Federal Reserve is nearing the end of its interest-rate hikes as inflation comes down and tighter financial conditions cool the economy. In the coming week, traders will find out if that’s likely the case as the central bank announces its latest decision and the monthly job-market report is released.

Investors have been plowing back into bonds, drawn by elevated yields amid expectations that an economic slowdown will drive the Fed to stop its hikes and then shift to easing monetary policy later this year. Benchmark 5- and 10-year yields have dropped around 40 basis points in January as money managers and pension funds continued to shift funds from equities to long-dated bonds.

“Asset managers came into the year with large cash balances and there is a little bit of a ‘get in now before its too late’ sentiment,” said Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management. Investors are seeing global disinflation signs, some weaker data and “if history is a guide it shows that turning points can be abrupt.”

That bullish mood was underscored this week when investors bought much bigger slices of new Treasury debt sales than is typically seen, locking in yields that remain near the higher end of the range seen over the past 15 years. At current levels, Treasuries are seen as an attractive hedge against a recession. Signs of a such a slowdown have been mounting, with companies like Intel Corp. bracing for a weaker outlook and consumers being squeezed.

That macroeconomic outlook is expected to keep benchmark yields rangebound, supported by the twin forces of moderating price pressures and employment growth. In the face of that, swaps traders are pricing in that the Fed will raise its benchmark rate — now in a range of 4.25% to 4.5% — by a quarter percentage point on Wednesday, followed by only one more such move this year.

On Friday, the Fed’s preferred inflation measure eased to the slowest annual pace in over a year. On Feb. 3, economists surveyed by Bloomberg expect the Labor Department to report that payroll growth slowed to 190,000 in January, down from 223,000 in December.

Other key data releases include the employment cost index and job-opening figures, along with the employment and price gauges in the ISM surveys of both manufacturing and services activity.

The slew of figures leave the Treasury market at risk of a reversal if Fed Chair Jerome Powell pushes back on traders’ expectations. At the Fed’s December meeting, officials indicated policy would stay elevated during 2023 at a peak of 5.1% with no rate cuts expected, a more hawkish forecast than markets are now pricing in.

“There is tension between the market and the Fed’s estimate of policy and it may take some time to resolve over the next three to six months,” said Goldman’s Wilson-Elizondo. “Enthusiasm for buying Treasuries likely continues,” unless “inflation proves stickier” and labor-market resilience makes people think “the Fed may need to keep policy restrictive to break the back of the jobs market.”

What to Watch

Economic calendar

Jan. 30: Dallas Fed manufacturing index

Jan. 31: Employment cost index; FHFA house-price index; S&P CoreLogic CS home price indexes; MNI Chicago PMI; Conference Board consumer confidence; Dallas Fed services activity

Feb. 1: MBA mortgage applications; ADP employment change; construction spending; S&P Global US manufacturing PMI; ISM manufacturing; job openings

Feb. 2: Jobless claims; factory orders

Feb. 3: US employment report; S&P Global US services PMI; ISM services

Fed calendar

Feb. 1: FOMC rate decision; Chair Jerome Powell press conference

Auction calendar:

Jan. 30: 13-, 26-week bills

Feb. 1: 17-week bills

Feb. 2: 4-, 8-week bills

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©2023 Bloomberg L.P.


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