Home Finance The bond market is selling off after traders got their Fed forecasts wrong

The bond market is selling off after traders got their Fed forecasts wrong

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The bond market is selling off after traders got their Fed forecasts wrong
U.S. Federal Reserve Chairman Jerome Powell speaks during a press conference at Federal Reserve Headquarters on January 31, 2024 in Washington, DC.
US Federal Reserve Chairman Jerome Powell.Anna Moneymaker/Getty Images
  • Bonds are selling off as traders reassess the path of the Fed’s rate cuts.

  • Strong economic data and the potential for a Trump victory have pushed interest rates higher.

  • 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, with traders adjusting 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, given the market pricing with a 90% probability of a 25 basis point rate cut by the Fed next month.

Fed officials, for their part, have indicated they are likely to act cautiously, though more rate cuts remain their base case.

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