One last make-or-break week has traders on edge

NEW YORK: It’s been a tempestuous year for US Treasuries. This week will set the stage for how it ends.

In the span of just a few days, investors will get updates on the major forces responsible for the unusually high volatility in the US bond market as it heads toward an unprecedented three-year loss.

Last Saturday’s escalation of the Israel-Hamas conflict will also draw the attention of investors, though in recent weeks haven flows into US Treasuries have been largely outweighed by concerns over the direction of monetary and fiscal policies.

The US government will spell out how many new bonds it will sell to plug the budget deficit, which is testing the market’s capacity to absorb a seemingly endless supply of US Treasuries.

The US Federal Reserve and the Bank of Japan (BoJ) will telegraph where monetary policy is heading, which may help shape demand from buyers overseas.

And this Friday, the US Labor Department will release its monthly employment report, a closely watched indicator of whether tighter monetary policy is cooling the economy as much as policymakers want.

It’s a crucial juncture for the bond market, where 10-year US Treasury yields during the past week briefly surged above 5% for the first time since 2007 before pulling back down.

Such moves have whipsawed investors, who are divided over whether yields will climb back up as the economy keeps going strong – or start sliding as high rates slow the economy.

“We’re going through a period of volatility,” said Amar Reganti, fixed-income strategist at Hartford Funds, who previously served as deputy director of the US Treasury’s debt-management department.

“The data is uncertain, there’s uncertainty about the composition of US Treasury supply, and then there’s a shift among the buyer base.”

The BoJ’s surprise decision in late July to relax its grip on long-term yields, allowing them to rise a bit, helped trigger a global fixed-income selloff by removing an anchor that kept Japanese investors buying government bonds overseas, where rates are higher. That’s heightened interest in the Oct 30-31 meeting.

“The more they do away with yield-curve control, that’s a bearish impulse on the back end of the US Treasury curve,” said Stephen Bartolini, fixed income portfolio manager at T. Rowe Price.

The BoJ is “on our checklist of things to mark a high in US yields. Getting off of yield-curve control could lead to the sort of the final impulse in this cycle.”

Arguably, the most important event of the week comes on Nov 1, when the US Treasury Department announces its plans for bond sales in the coming months.

In August, long-term yields rose after the so-called quarterly refunding announced a ramp-up in debt sales for the first time in over two years.

US Treasury Secretary Janet Yellen has dismissed speculation that yields are being pushed up by the need to finance the swelling deficit, which doubled to around US$2 trillion in the fiscal year through September. — Bloomberg