What Happened Last Week
- Yields Climb Higher: Last week yields continued their march higher as several factors worked against long bonds.
- French Fiscal Woes: French budget issues and widespread unrest have pushed French-German bond spreads to multi-year wides.
- Fed Hold Likely: Soft labor data last week called an October Fed hike into question, which further pressured long-end yields.
What We’re Watching This Week
- Fed in Focus: With the Fed now expected to hold rates steady in October, investors will closely watch the September meeting minutes and comments from Fed officials, especially Governor Waller on Thursday.
- Treasury Auctions: The Treasury is set to auction notes across the curve in another test of investor demand for long-term U.S. bonds.
- European Yields: We are also monitoring the situation in France for indications that global fiscal scrutiny is further dampening demand for government bonds.
Investment Management Team’s Views
Treasury yields climbed in an unhealthy bear-steepening trade last week, weighing on equities and reinforcing the narrow market leadership that characterized much of September. Notably, long-end yields reached new highs even as labor data came in softer than expected. This price action suggests higher yields globally are beginning to pressure each other. Renewed fiscal concerns in France pushed the spread between French and German government bonds above 150 basis points, levels last seen during the European debt crisis, while the Euro weakened and European equities lagged. The U.S. is not France, but renewed global scrutiny of government finances is making investors more hesitant to step in and buy long-duration bonds, even at increasingly attractive yields.
The Fed is providing another source of pressure on the long end as policymakers appear less inclined to hike again in October. Vice Chair Jefferson and other officials signaled last week that the Fed can afford to wait for more data, while Friday’s soft payroll report pushed market odds of an October hike sharply lower. That would normally support bonds, but investors increasingly appear concerned that policy is not adjusting quickly enough to the stronger growth environment reflected in markets over the past several months. The persistent steepening of the curve is important in that respect. Until the Fed and the market develop a more consistent view of where policy ultimately needs to settle, we expect long-term yields to remain volatile.
The week ahead is relatively light on major corporate catalysts, leaving rates and policy firmly in focus. Wednesday’s minutes from the September Fed meeting should provide more detail on how policymakers viewed the first hike of the cycle and what would be required for another move, while services data, jobless claims, and consumer sentiment will provide incremental reads on growth. Developments in France will remain relevant to the global bond market as well. With only a handful of major companies reporting this week before third-quarter earnings season begins in earnest next week, the bond market is likely to remain the primary source of direction for equities in the near term.