Bond traders intensify focus on US jobs data for Treasuries' next step

New York

THE world's biggest bond market won't have to wait long for its next potential volatility jolt, with a pivotal US jobs reading ahead that will help shape bets on the path of Treasury yields for the remainder of 2021.

The yield curve just posted its first week of steepening since July, rebounding from its flattest level in a year after a highly anticipated speech by Federal Reserve chair Jerome Powell. He stressed that the central bank could start slowing its debt purchases in 2021, though it won't rush to begin raising rates thereafter.

He also expressed caution about the surging Delta variant, leaving traders to focus on August jobs data to gauge at which of the three remaining 2021 policy meetings the Fed might be confident enough to unveil its tapering plans. Against that backdrop, robust labour figures on Sept 3 could extend the steepening trend by fuelling bets that tapering will come sooner rather than later.

"Powell did an exceptional job of trying to separate the requirements and thresholds for tapering as being very different - saying there was a substantially more stringent test for rate hikes," Gene Tannuzzo, a portfolio manager at Columbia Threadneedle, said. "So I think if it is better than expected data through this Delta surge and the tapering is happening, that the yield curve could steepen."

The median projection is for an addition of 750,000 jobs in August, compared with a gain of 943,000 in July. An above-forecast August figure is likely to put the 10-year yield on course toward 1.5 per cent or higher, Mr Tannuzzo said, from about 1.3 per cent now.

It may also offer traders a burst of volatility. The ICE BofA MOVE Index - which tracks implied price swings in Treasuries - is hovering around its average for 2021, after Mr Powell's Friday speech failed to spur much in the way of turbulence.

The yield curve, as measured by the gap between 5- and 30-year yields, is around 111 basis points. It has flattened from a 2021 peak of 167 basis points touched in February - an inflection point that some Wall Street strategists had pegged as the end of a multi-year steepening trend. The flattening of recent months came as traders started to anticipate Fed lift-off from near-zero interest rates within the next couple of years. But the recent spread of the Delta variant is raising uncertainty about the path of the economy, and thus Fed policy.

The Fed is now buying a combined US$120 billion of Treasuries and mortgage-backed securities a month. When it unwound its quantitative easing programme introduced in the aftermath of the 2008 financial crisis, it took 10 months to complete the paring down. The central bank announced its plans in December 2013 and began reducing monthly purchases the following month. BLOOMBERG