Bond Traders See 4.5% Yields as Next Test as Focus Shifts to CPI


(Bloomberg) — There’s one hope left for bond traders burned by this year’s selloff: a sign that the Federal Reserve is gaining the upper hand in its fight against inflation.

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The surprisingly strong US economy has driven Treasury yields to the highest since late November as investors dial back bets on interest-rate cuts, wagering that policymakers will be wary of easing policy prematurely. The market took another leg downward on Friday after data showed that US payrolls unexpectedly expanded in March by the most in nearly a year.

That’s left investors seeing Wednesday’s consumer-price index report as the next key event that will determine whether yields stabilize — or push toward new highs. Many see the 10-year rate at 4.5% as the next major threshold, just above the roughly 4.4% level where it ended Friday.

“A lot depends on the CPI number — it could keep yields in the 4% to 4.5% range or set us up for a bigger rise,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “The main risk for the bond market is a scenario of continued solid jobs reports and the inflation improvement stalls.”

The Treasury market has struggled to find a bottom this year as the economy has defied gloomy forecasts, scuttling once widespread conviction that the Fed by now would already be cutting interest rates to spur growth. While the resilience has helped drive stocks higher, bonds have delivered another round of losses as yields push through levels where they were previously expected to stabilize.

Fed Chair Jerome Powell has said that the central bank won’t ease policy until it has more confidence that inflation is moving sustainably toward its 2% target. But the Fed has also continued to pencil in three quarter-put cuts this year and Powell has emphasized that policymakers are ready to swoop in — if needed — to prevent an unexpected deterioration of the job market.

The prospect that the economy will continue to grow at a solid pace has driven the pressure on longer-dated bonds by fanning concerns about the inflation outlook.

Stephen Bartolini, a fixed-income portfolio manager at T. Rowe Price Group, in March said he was standing ready to pounce if the 10-year should rose over 4.4%. But he’s since reconsidered and said his portfolios are leaning toward bets that yields could rise even more.

“A month ago, two months ago, it would’ve been a case that 4.5% looks good, and now I want to be a little patient because the economy is stronger,” he said. “The data has certainly most recently been better than expected and we’ve certainly seen that in the last week. The inflation side has been stickier than most expected.”

What Bloomberg Intelligence Says…

“If the selloff continues toward 4.51% over the next week, momentum indicators may reach territory consistent with a pause or partial retracement. A break of 4.51% targets the early November, 2023 yield high at 4.7%.”

— Ira F. Jersey and Will Hoffman, BI strategists

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Economists forecast that the CPI data on Wednesday will show some easing of inflation pressures. On a monthly basis, both the overall and core reading — which excludes food and energy costs — are projected to have risen by 0.3% in March, down from 0.4% in February, according to economists surveyed by Bloomberg. Yet that would still leave the core gauge up around 3.7% from a year earlier, well above the Fed’s comfort zone, particularly given the recent jump in oil prices.

If the figures come in at or below those levels, it may stabilize yields or even pull them back from recent levels. On the other hand, a higher-than-expected reading could drive another round of selling, though some money managers said institutional investors may shift back in if the 10-year rate pushes above 4.5%.

“They will step in aggressively next week if we get there,” said Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investment.

Priya Misra, portfolio manager at JPMorgan Asset Management, said she thinks it’s already time to start shifting toward 10-year notes. She noted that wage gains have been subdued despite the strong labor market, indicating that the demand for workers isn’t fueling upward pressure on inflation.

“My strongest conviction right now is to start legging into 10 years,” she said.

What to Watch

  • Economic data:

    • April 8: New York Fed 1-yr inflation expectations

    • April 9: NFIB small business optimism

    • April 10: MBA mortgage applications; Consumer price index; real average hourly and weekly earnings, wholesale inventories; monthly budget statement

    • April 11: Producer price index; initial jobless claims

    • April 12: Import and export price index; U. of Mich, sentiment and inflation expectations

  • Fed calendar:

    • April 8: Minneapolis Fed President Neel Kashkari

    • April 10: Governor Michelle Bowman; Chicago Fed President Austan Goolsbee; FOMC meeting minutes from March

    • April 11: New York Fed President John Williams; Boston Fed President Susan Collins; Atlanta Fed President Raphael Bostic

    • April 12: Bostic; San Francisco Fed President Mary Daly

  • Auction calendar:

    • April 8: 13-, 26-week bills

    • April 9: 42-day cash management bills; three-year note

    • April 10: 17-week bills; 10-year notes

    • April 11: 4-, 8-week bills; 30-year bonds

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