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Bonds are selling off as traders reassess the path of the Fed’s rate cuts.
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Strong economic data and the potential for a Trump victory have pushed interest rates higher.
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The Fed may keep rates unchanged next month, and the October jobs report is a key indicator to watch.
The bond market is in sell-off mode as traders reassess the Federal Reserve’s trajectory of rate cuts.
Strong economic data in recent weeks and the potential for a Donald Trump victory in November have helped push bond yields higher and prices lower. Traders have adjusted their outlooks after pricing in aggressive rate cuts following the Fed’s big 50 basis point move last month.
Ten-year U.S. Treasury yields rose to 4.22% on Tuesday, representing the highest level since July and a sharp increase from the 3.62% it was trading at in mid-September, when the Fed made a major rate cut.
The Bloomberg Aggregate Bond Index is down 3% since mid-September, and long-term government bonds, as measured by the iShares 20+ Year Treasury Bond ETF, are down about 9% over the same period.
On the economic front, investors have focused on a recent set of current data, which has reduced the likelihood of quick, sharp cuts from the central bank at upcoming meetings.
A strong jobs report from September, which showed as many as 254,000 new jobs added, completely erased the chances of another 50 basis point cut.
The employment data, combined with solid retail sales, slightly higher-than-expected inflation and the Atlanta Fed’s forecast of 3.4% of GDP in the third quarter, have forced markets to reconsider how eager the Fed will be to lower borrowing costs to support the economy.
Apollo chief economist Torsten Sløk argued in a note last weekend that officials will reverse course and keep rates unchanged at next month’s Federal Open Market Committee meeting.
“The US consumer continues to do well, thanks to solid job growth, strong wage growth and high stock and home prices,” Sløk said.
Sløk says the most important indicator to watch is the upcoming October jobs report.
“Look at the next nonfarm payroll report. If we get that to 150 or 200,000, we could easily have a scenario where the Fed actually has to change course and stay on hold,” Sløk told Bloomberg on Monday.
That would be a big surprise for traders, as the market estimates a 90% chance of a 25 basis point Fed rate cut next month.
Fed officials, for their part, have indicated they are likely to act cautiously, though more rate cuts remain their base case.
“To date, I have not seen any information that would indicate that we would not continue to cut rates,” Mary Daly, chair of the San Francisco Fed, said Monday.
Other Fed officials had a similar message.
Minneapolis Fed Chairman Neel Kashkari said he expects “modest cuts in coming quarters.” Dallas Fed President Lorie Logan said she expects rates to fall “gradually,” and Kansas City Fed President Jeff Schmid endorsed a “cautious and gradual” approach to cutting rates.
Meanwhile, a potential Trump victory next month is seen as inflationary due to his proposed policy of universal tariffs.
Tariffs are the centerpiece of Trump’s economic proposals, which he insists would lower costs even as economists warn that taxes on imports will ultimately be passed on to consumers.
A revival of inflation would lead to a more aggressive Fed, which could slow rate cuts or even raise rates again to offset rising prices.
“If he were to retake the White House in November, the dollar would likely rise sharply, at least in the near term, on expectations of higher U.S. rates and interest rates,” Capital Economics said in a recent note.
Experts told Business Insider that a Trump administration pursuing its most extreme campaign proposals would mark a “seismic” shift for the US economy, with major consequences for inflation and Fed policy.
Read the original article on Business Insider
