The world’s biggest bond market is about to enter a make-or-break week that goes well beyond the contentious battle for the White House.
The Nov. 3 elections loom large, with no guarantee that investors will know the winner that night, or which party will control Congress. But traders have much more to worry about, starting the very next morning. That’s when Treasury unveils its quarterly issuance plans, and there’s a risk of sharp yield swings given Wall Street dealers are split over whether debt sales will set another record high or remain at current levels. The Federal Reserve’s decision Thursday is almost the least of investors’ concerns, with no change foreseen. Friday’s release of monthly jobs data rounds out the week.
It’sa crucial stretch for a Treasuries market that’s on pace for its best performance since 2011. Amping up the potential for volatility, hedge funds and other speculators that use leverage to boost returns havea record wager on losses in bond futures. They could be forced to exit those bets, fueling a Treasuries rally, if the electoral result leaves investors slashing expectations for a major virus-relief package that boosts growth prospects.
“This is shaping up to be the most impactful week for markets in years given how divisive the election has been amid a global pandemic and with the government already issuing astounding amounts of debt,” said Zachary Griffiths, a rates strategist at Wells Fargo. “There’s potentially a lot of things coming together at once.”
Polls give Democrat Joe Biden thelead over President Donald Trump. But it’s acloser call for Democrats’ bid to retake the Senate. The probability of the party controlling the White House and Congress is 58%, compared with as high as 62% in early October, according to PredictIt.
Investor bets that a Democratic sweep would pave the way for more fiscal spending and increased debt sales lifted yields on 10-year Treasuries, the benchmark for global borrowing, to 0.87% at the end of October, a four-month high.
A sustained climb in long-term yields would upend one of the market’s strongest years in the past decade. U.S. Treasuries have earned about 8% in 2020, according to Bloomberg Barclays index data.
“The polls suggest Biden has a better chance of winning the presidency, but at the same time they are less convincing on what will happen with the Senate,” said Matthew Hornbach, global head of macro strategy at Morgan Stanley. “And our view is that a united-government outcome would put the most upward pressure on U.S. rates.”
Morgan Stanley forecasts the 10-year will end 2020 at 0.95%.
Bond traders will turn their attention next to the Treasury’s refunding announcement on Wednesday at 8:30 a.m. New York time.
This is another opportunity for long-term yields to jump if firms such as TD Securities, Citigroup Inc. and NatWest Markets prove correct in predicting larger auctions. Deutsche Bank AG and Amherst Pierpont Securities LLC, are among outliers seeing even bigger increases, by as much asin August — so another boost of $6 billion to sales of 10-year notes, $5 billion to 20-year bonds and $4 billion to 30-year debt.
The yield curve may flatten, however, if others — such as Barclays Plc, Jefferies and Societe Generale — prove prescient in forecasting no changes. Their views are mostly based on the uncertainty over additional pandemic-relief spending, at a time when Treasury is sitting on a near-record pile of cash.
The least stressful of this jam-packed week’s major events may be the Fed’s decision Thursday, as most economists predict no changes to policy.
Still, Chair Jerome Powell in his press conference that afternoon could discuss steps the central bank may take to support the economy as the pandemic rages on. Traders are most keenly focused on the Fed’s plans for its bond-buying program.
“The overall word for this week is uncertainty,” said Tony Rodriguez, head of fixed-income strategy at Nuveen Asset Management, which oversees about $1.1 trillion. “If the FOMC did surprise, it would be with more accommodative commentary or actions — though they are still more likely to wait to do something until December.”
Central-bank officials have been pressing lawmakers for further stimulus spending with virus cases mounting. With no such relief coming, the Fed on Friday reduced the minimum loan size in its Main Street Lending Program.
Capping off the week, Friday is projected to bring fresh evidence that the labor market’s rebound is moderating. The consensus is for an addition of about 600,000 nonfarm jobs in October, down from 661,000 in September.
What to Watch
- The economic calendar
- Nov. 2: Markit U.S. manufacturing PMI; ISM manufacturing; construction spending
- Nov. 3: Factory orders; durable/capital goods orders; Wards vehicle sales
- Nov. 4: MBA mortgage applications; ADP employment change; trade balance; Markit U.S. services, composite PMI; ISM services
- Nov. 5: Challenger job cuts; weekly jobless claims; nonfarm productivity; Bloomberg consumer comfort
- Nov. 6: Nonfarm payrolls; wholesale inventories; consumer credit
- Nov. 2: 13-, 26-week bills
- Nov. 3: 119-, 42-day cash-management bills; 52-week bills
- Nov. 5: 4-, 8-week bills
— With assistance by Edward Bolingbroke, Benjamin Purvis, and Nancy Moran
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