After the Federal Reserve unanimously approved a rate hike last month, US Treasury yields jumped sharply; last week they were essentially unchanged, hovering near 24-year highs.
In the new week, investors are waiting for two things: fresh data, and hints from Fed Chair Kevin Warsh about how quickly the Fed will continue raising rates.
Selloff held in check by jobs data, yields stuck at high levels
This round of bond selling has been restrained by the nonfarm payrolls report showing a sharp slowdown in job growth.
That led traders to expect the Fed to stand pat at its next meeting in late October — they still expect a 25 basis point hike in December, plus two more by the end of 2027.
According to reports, the 10-year Treasury yield touched 5.364% intraday on October 7, the highest since 2002, while the 30-year touched 5.696% in the same period; the 10-year yield has risen nearly 120 basis points so far this year, and the third quarter was the worst quarter for US Treasuries since 1994.
The risk is asymmetric: a slightly higher CPI is far more troublesome than a slightly lower one
Current positioning is amplifying a risk: if September's Consumer Price Index (CPI) comes in hotter than expected, it could reignite this selloff, because it would put pressure on the Fed to hike more aggressively.
Molly Brooks, US rates strategist at TD Securities, believes the risk around this CPI report is asymmetric — hotter data could signal the Fed needs to speed up tightening; weaker or in-line data would continue to support the Fed staying cautious going forward.
September CPI is scheduled for release on Wednesday (October 14); according to a survey of economists, it is expected to rise 0.6% month-on-month, up from the previous 0.4%; excluding volatile food and energy prices, core CPI is expected to slow to 0.2% month-on-month from 0.3%.
Both year-on-year measures are expected to rise, with headline at 3.6% and core at 2.5%.
Warsh's window: the last week before the quiet period
Warsh will take part in a discussion on Thursday at the International Monetary Fund (IMF) annual meetings in Bangkok, Thailand.
Two other officials closely watched — Fed Governor Christopher Waller and Cleveland Fed President Beth Hammack — will also speak.
The Fed will enter its routine communications blackout period starting Saturday, until the two-day policy meeting ending October 28.
Brooks said: "This will be the last week before the quiet period, so the Fed comments after CPI will help the market have less uncertainty about the outcome of the next meeting."
She also said: "Warsh will likely continue to avoid forward guidance, and that is exactly what the market expects."
Rate futures currently show about an 80% probability of no move at the October meeting; after September nonfarm payrolls added just 29,000 jobs, market pricing for an October hike fell from about 70% to 20%-25%.
Waller said on October 8 that rate hikes "do not have to happen at consecutive meetings" — which the market read as a signal that a pause in October is possible.
Separately, the bond market was closed on Monday for a public holiday, while US stocks traded as usual.
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