Connect with us

Business

The Treasury Market’s Big Recession Trade Is Gathering Momentum

News Agencies

Published

on

The Treasury Market’s Big Recession Trade Is Gathering Momentum

(Bloomberg) — The bond market is zeroing in on a US recession next year, with traders betting that the longer-term trajectory for interest rates will be down even as the Federal Reserve is still busy raising its policy rate.

Most Read from Bloomberg

Long-dated Treasury yields are already below the Fed’s overnight benchmark range — currently 3.75% to 4% — and there’s still an extra percentage point of central bank increases priced in for the coming months. Activity has also emerged in the options market that suggests some are hedging against the risk that policy rates could eventually halve from their current level.

Rather than wait for conclusive economic evidence that this year’s frenetic monetary tightening will deliver recessionary conditions in 2023, investors have been buying bonds — a stance advocated by Pacific Investment Management Co., among others.

Advertisement

“Fed policy is dynamic and they are still signaling they are going to go higher,” said Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities. “But the market trades like it is more comfortable with the Fed getting to an end game.”

Demand for Treasuries with longer tenors this week dragged the rate on 10-year and 30-year securities below the lower bound of the Fed’s overnight range. With front-end rates holding relatively steady, that’s seen an intensification of the most pronounced yield curve inversion in four decades — a widely watched indicator of potential economic pain to come.

“The recession indicator narrative is strong, but from the Fed’s perspective it is part of the solution,” said Faranello.

Advertisement

The US economy — and in particular the labor market — has so far shown itself to be quite resilient in the face of Fed rate increases, which are aimed at trying to curb high and seemingly persistent inflation. Investors will therefore be keenly attuned to the monthly jobs report this coming Friday for signs of cracking, or indications about whether it might pave the way for the Fed to tweak its policy course.

They’ll be scrutinizing carefully the words of Fed Chair Jerome Powell and his colleagues, who will speak publicly next week for the last time before heading into the customary blackout period ahead of the Fed’s Dec. 13-14 policy meeting. While minutes of their most recent meeting showed that they’re likely to slow the pace of tightening soon, officials have been firm in reiterating the need for policy rates to move above current levels.

Advertisement

At this stage of the cycle, Fed jawboning may prove less effective than the tone of data, given expectations of a gradual slowing of policy tightening from here amid a conviction that inflation has peaked and job creation is slowing.

The scale of bullishness in the long-end of the bond market right now — and the depth of the yield curve inversion — means that there could be some turbulence for Treasuries as traders navigate a range of top-tier data in the coming week, not just the jobs report. Recession bets could find succor from a forecast contraction in the ISM manufacturing gauge, while the personal income and spending report will show how things are evolving on personal consumption expenditure, the Fed’s preferred gauge of inflation. Figures on the number of job openings are also scheduled for release.

Current swap-market pricing shows the effective fed funds rate rising to around 5% by the middle of next year, followed by a pullback that takes it more than half a percentage point lower by early 2024. But some are betting on a much sharper reversal, with trades this week tied to Secured Overnight Financing Rate futures focused on the possibility of a decline to 3% or even 2% by either the end of 2023 or early 2024.

Advertisement

That said, there is resistance in some quarters to the current bond market consensus about the Fed, the economy and of course the eventual return of low inflation next year. This week Goldman Sachs Group Inc. said the 10-year will trade above 4% through to 2024 as expectations for rate cuts next year are dashed by the economy not entering a recession and inflation remaining high.

That’s far from the central view though. Market pricing is suggesting that even if the Fed itself is not yet pivoting on policy, many investors are increasingly turning their eyes away from the risk of relentless Fed hikes and toward a possible economic slump.

What to Watch

Advertisement
  • Economic calendar:

    • Nov. 28: Dallas Fed manufacturing activity index

    • Nov. 29: Conference Board consumer confidence; FHFA house price index

    • Nov. 30: ADP employment; MBA mortgage applications; third-quarter gross domestic product; advance goods trade balance; wholesale and retail inventories; MNI Chicago purchasing managers index; pending home sales; JOLTS jobs openings; Fed beige book

    • Dec. 01: Personal income and spending report, including PCE; weekly jobless claims; ISM manufacturing

    • Dec. 02: Monthly jobs report

  • Fed calendar:

    • Nov. 28: New York Fed’s John Williams; St. Louis Fed’s James Bullard

    • Nov. 30: Chair Jerome Powell; Governors Lisa Cook and Michelle Bowman

    • Dec. 01: Vice Chair for Supervision Michael Barr; Dallas Fed’s Lorie Logan; Bowman

    • Dec. 02: Chicago Fed’s Charles Evans

  • Auction calendar:

    • Nov. 28: 13-week and 26-week bills

    • Nov. 29: 52-week bills

    • Nov. 30: 17-week bills

    • Dec. 01: 4-week, 8-week bills

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.

Advertisement
Continue Reading
Advertisement

Advertisement

Breaking News

Editor Pick’s

Latest Entertainment

Alec Baldwin wants 'Rust' prosecutor dismissed as she's a Republican lawmaker: 'Unconstitutional' Alec Baldwin wants 'Rust' prosecutor dismissed as she's a Republican lawmaker: 'Unconstitutional'
Entertainment2 hours ago

Alec Baldwin wants ‘Rust’ prosecutor dismissed as she’s a Republican lawmaker: ‘Unconstitutional’

Alec Baldwin seen in New York City as he’s officially charged with involuntary manslaughter for the fatal shooting of cinematographer...

Harry Styles' dancers say Grammys set malfunction nearly caused chaos Harry Styles' dancers say Grammys set malfunction nearly caused chaos
Entertainment2 hours ago

Harry Styles’ dancers say Grammys set malfunction nearly caused chaos

Harry Styles and a crew of dancers unexpectedly found themselves rotating the wrong way during a live performance at this...

Pamela Anderson says she penned Britney Spears a 'private letter' to thank her for support Pamela Anderson says she penned Britney Spears a 'private letter' to thank her for support
Entertainment3 hours ago

Pamela Anderson says she penned Britney Spears a ‘private letter’ to thank her for support

Pamela Anderson sent Britney Spears a private letter thanking her for her public support. (Photos: Getty Images) Pamela Anderson says...

Is Kevin Costner quitting 'Yellowstone'? Everything you need to know about the state of the hit franchise Is Kevin Costner quitting 'Yellowstone'? Everything you need to know about the state of the hit franchise
Entertainment4 hours ago

Is Kevin Costner quitting ‘Yellowstone’? Everything you need to know about the state of the hit franchise

Kevin Costner in Season 5 of the Paramount hit Yellowstone. (Photo: Courtesy of Paramount Network) Could the Dutton ranch shut...

'They live up to the hype': These Bose noise-cancelling headphones are down to $279 'They live up to the hype': These Bose noise-cancelling headphones are down to $279
Entertainment6 hours ago

‘They live up to the hype’: These Bose noise-cancelling headphones are down to $279

If you haven’t yet treated yourself to a pair of top-notch noise-cancelling headphones, the moment has come. Right now, Amazon...

These Bose noise-cancelling headphones 'live up to the hype' — and they're down to $279 These Bose noise-cancelling headphones 'live up to the hype' — and they're down to $279
Entertainment6 hours ago

These Bose noise-cancelling headphones ‘live up to the hype’ — and they’re down to $279

If you haven’t yet treated yourself to a pair of top-notch noise-cancelling headphones, the moment has come. Right now, Amazon...

Harry Potter Franchise Seemingly Introduces Its First Trans Character in New 'Diverse' Video Game Harry Potter Franchise Seemingly Introduces Its First Trans Character in New 'Diverse' Video Game
Entertainment6 hours ago

Harry Potter Franchise Seemingly Introduces Its First Trans Character in New ‘Diverse’ Video Game

Harry Potter Gets First Transgender Character in New ‘Representative and Diverse’ Video Game Hogwarts Legacy Warner Bros. Games The Harry...

Ashton Kutcher says he didn't put arm around Reese Witherspoon at their premiere to avoid 'affair' rumors Ashton Kutcher says he didn't put arm around Reese Witherspoon at their premiere to avoid 'affair' rumors
Entertainment6 hours ago

Ashton Kutcher says he didn’t put arm around Reese Witherspoon at their premiere to avoid ‘affair’ rumors

Reese Witherspoon and Ashton Kutcher attend the premiere for Your Place or Mine in Los Angeles on Feb. 2, 2023....

Advertisement

Latest Sports

LeBron James scoring tracker: Will Lakers star break Kareem Abdul-Jabbar's record on Tuesday? LeBron James scoring tracker: Will Lakers star break Kareem Abdul-Jabbar's record on Tuesday?
Sports36 mins ago

LeBron James scoring tracker: Will Lakers star break Kareem Abdul-Jabbar’s record on Tuesday?

LeBron James is closing in on Kareem Abdul-Jabbar's all-time scoring record, and the Los Angeles Lakers superstar could break the...

Aaron Rodgers says he will contemplate football future by spending '4 nights in complete darkness' Aaron Rodgers says he will contemplate football future by spending '4 nights in complete darkness'
Sports1 hour ago

Aaron Rodgers says he will contemplate football future by spending ‘4 nights in complete darkness’

The Packers QB will be in isolation and says the experience could cause hallucinations.

LeBron was never fully satisfied with his game LeBron was never fully satisfied with his game
Sports2 hours ago

LeBron was never fully satisfied with his game

For LeBron James, becoming "a complete basketball player" has been a 20-year journey that has him on the cusp of...

Chris Simms explains how Mac Jones landed in Bill Belichick's 'doghouse' in 2022 Chris Simms explains how Mac Jones landed in Bill Belichick's 'doghouse' in 2022
Sports2 hours ago

Chris Simms explains how Mac Jones landed in Bill Belichick’s ‘doghouse’ in 2022

The Patriots' dysfunction on offense last season apparently included Mac Jones getting on Bill Belichick's bad side by taking matters...

What Ja Morant said when asked about friends' postgame confrontation with Indiana Pacers What Ja Morant said when asked about friends' postgame confrontation with Indiana Pacers
Sports3 hours ago

What Ja Morant said when asked about friends’ postgame confrontation with Indiana Pacers

Morant spoke to reporters Tuesday morning for the first time since the incident became public.

NBA rumors: Warriors willing to trade young players for significant upgrade NBA rumors: Warriors willing to trade young players for significant upgrade
Sports3 hours ago

NBA rumors: Warriors willing to trade young players for significant upgrade

The Warriors reportedly could move some of their youth before the NBA trade deadline on Thursday.

What Colts' offer to Bears for No What Colts' offer to Bears for No
Sports3 hours ago

What Colts’ offer to Bears for No. 1 NFL Draft pick could look like

Here is what the Chicago Bears could hope to get from the Indianapolis Colts if they trade the No. 1...

History not lost on Hurts: 'Carry that torch' History not lost on Hurts: 'Carry that torch'
Sports4 hours ago

History not lost on Hurts: ‘Carry that torch’

Jalen Hurts is proud to be part of the first matchup of Black QBs in Super Bowl history because he...

Technology Hot News

Led by "Amazon" and "Microsoft" . Led by "Amazon" and "Microsoft" .
Technology3 weeks ago

Led by "Amazon" and "Microsoft" .. the technology giants are planning to lay off 64,000 employees

After 10 years of driving the stock market bull run, big tech companies are racing to downsize staff to adapt...

Apple introduces MacBooks with new M2 processors Apple introduces MacBooks with new M2 processors
Technology3 weeks ago

Apple introduces MacBooks with new M2 processors

Yesterday, Tuesday, Apple unveiled MacBooks powered by the new, faster “M2 Pro” and “M2 Max” processor chips, in a surprise...

All you need to know about the upcoming Galaxy S23 phones from Samsung All you need to know about the upcoming Galaxy S23 phones from Samsung
Technology3 weeks ago

All you need to know about the upcoming Galaxy S23 phones from Samsung

Samsung has officially announced that the (Galaxy Unpacked 2023) event will be held this year on Wednesday, February 1, which...

FTX Exchange Announces Hacking and Stolen $415 Million in Cryptocurrency FTX Exchange Announces Hacking and Stolen $415 Million in Cryptocurrency
Technology3 weeks ago

FTX Exchange Announces Hacking and Stolen $415 Million in Cryptocurrency

Bankrupt American cryptocurrency firm FTX announced today, Wednesday, that $415 million in cryptocurrency has been hacked and stolen from the...

Because of a "fraudulent tweet".. Because of a "fraudulent tweet"..
Technology3 weeks ago

Because of a "fraudulent tweet"… Elon Musk's trial begins

Elon Musk's trial began Tuesday in San Francisco with the selection of jury members who will have to decide whether...

An electric spoon replaces salt and spices, but with conditions An electric spoon replaces salt and spices, but with conditions
Technology3 weeks ago

An electric spoon replaces salt and spices, but with conditions

Experts have developed an electric spoon that is able to replace spices and flavors and affect the taste buds in...

The biggest dangers of using tracking devices. The biggest dangers of using tracking devices.
Technology3 weeks ago

The biggest dangers of using tracking devices.. so you can escape?

If you spot an unknown Bluetooth tagging device, there are ways to disable the device so it can't track your...

New Twitter. New Twitter.
Technology3 weeks ago

New Twitter.. For You tab to web version

The Twitter platform announced that it will bring the new tab (For You), which launched last Tuesday for iPhones and...

Advertisement