Benchmark 10-year Treasury yields came within a whisker of 3% as traders bet that US policy makers will double down on their hawkish stance at the upcoming Jackson Hole symposium.

The 10-year US yield rose as much as three basis points to 2.9997%, adding to Friday’s nine-basis-point climb. The last time the US yield was above 3% was on July 21. Similar-dated Australian and New Zealand yields jumped over 11 basis points each.

A robust US jobs market is backing the Fed’s case that more outsized rate hikes are needed even as signs emerge that inflation appears to be moderating. Fed Chair Jerome Powell may use a speech at Jackson Hole on Friday to push back on bets that rates will fall in 2023 as higher borrowing costs crimp growth.

“The bears seem to be in control as US Treasury supply weighs on bond prices, recent strong jobs numbers and European inflation and the energy crisis underscore expectations central banks will stay aggressive,” said James Wilson, a senior portfolio manager in Melbourne at Jamieson Coote Bonds, which oversees $3 billion. “That’s encouraging markets to position for further bond declines as the Jackson Hole gathering approaches.”

Market positioning reflects this. An aggregate gauge of non-commercial positions across all Treasury maturities shows bearish bets have grown to the most since 2018, according to data from the Commodity Futures Trading Commission.

Price pressures remain elevated across the globe, underscoring the view of Fed officials that July’s softer US inflation print doesn’t necessarily portend a substantial easing in costs. Annual inflation topped 10% in the UK last month while Bundesbank Chief Joachim Nagel has warned Germany may see similar levels in the fall.

Taming Inflation

New Zealand’s central bank on Monday said it is open to the possibility of raising its benchmark rate as high as 4.25% amid uncertainty over the amount of tightening needed to regain control of inflation.

“Powell will reiterate that the Fed’s commitment to bringing down inflation will require an extended period of restrictive policy and thus below-potential growth and higher unemployment,” Tom Kenny, a senior economist at ANZ Banking Group, wrote in a note to clients. “Chair Powell’s speech will be very different to last year’s when he got the inflation story very wrong. He put forward a case for why elevated inflation would prove transitory.”

One of this year’s hottest trades is under pressure as speculation builds that Fed officials may use this week’s gathering to push back on bets that they will start easing policy next year.

Wagers on flattening yield curves have been a winner for most of the past year, with rates on longer-dated securities moving lower relative to shorter-term benchmarks. The two-year Treasury yield was at 3.26% on Monday, about 28 basis points higher than the 10-year rate.

“Powell will want to err on the hawkish side,” stressing that restoring price stability is the top priority, said Tim Magnusson, chief investment officer at Garda Capital Partners, a hedge fund. “The flattener will be in play until the Fed stops tightening,” however, “it’s a harder trade now,” having already moved so much.

Source:
courtesy of BLOOMBERG

by Garfield Clinton Reynolds

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