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Bond Traders' High Hopes for September Rate Cut Hinge on CPI
Bond Traders' High Hopes for September Rate Cut Hinge on CPI

Mint

time7 days ago

  • Business
  • Mint

Bond Traders' High Hopes for September Rate Cut Hinge on CPI

(Bloomberg) -- Bond investors betting on a Federal Reserve interest rate cut next month face a potential roadblock: inflation. July's consumer price index, due on Tuesday, will give traders clues on how President Donald Trump's tariffs are affecting costs. Economists surveyed by Bloomberg expect the annual core inflation rate to rise to 3%, the highest since February. 'The market is looking for further confirmation that changes to trade policy are passing through into higher goods inflation,' said Gennadiy Goldberg, head of US rates strategy at TD Securities, 'All else equal, a higher inflation print could leave the Fed wanting to see more data before cutting rates.' That would disappoint investors, who are betting on two rate cuts by the end of the year, starting as soon as September. Signs of a weakening US job market bolstered their belief that it was time for the first cut since December. Treasury yields have fallen to levels seen in late April and a gauge of their total returns delivered broad gains of 4% this year, on course for its best annual run since 2020. The 10-year benchmark yield was little changed at 4.28% in Asia trading Tuesday. Since the soft July payrolls report, bond traders' activity in the options market has largely targeted a deeper and longer path of rate cuts over the coming months. Investors have been actively betting that a quarter-point rate cut will remain likely for the Fed's Sept. 17 meeting. Meanwhile, some are positioning for inflation data that could give the Fed a green light for a half-point cut, shown by Monday activity in options linked to the Secured Overnight Financing Rate, which closely tracks the expected path of US monetary policy. If the CPI number is in-line with market expectations, the 'carry' on long positions on Treasury Inflation-Protected Securities will likely turn negative in September, JPMorgan Chase & Co. strategists said Monday, adding they remain neutral on breakeven rates ahead of the data. However, the risk of fast-rising prices is top of mind for Fed Chair Jerome Powell as well as some on Wall Street. Recent notes from Bank of America Corp., Apollo Global Management Inc. and Bank of New York Mellon Corp. have flagged stagflation as a significant concern. The combination of persistently high inflation and sluggish economic growth is also a risk to the dollar, which has weakened nearly 8% against a basket of peers this year. Strategists at TD Securities on Monday said the slump will deepen under a stagflation scenario. Sticky inflation would temper the Fed's ability to ease rates towards the 3% area being priced by swaps over the next 12 months. It could also put upward pressure on Treasury yields, which rose last week after a trio of soft auctions for the securities reflected waning demand for US government debt ahead of the CPI report. If inflation continued rising in July, that 'would reinforce what Powell has said about their dual-mandate — of stable employment and inflation — coming into conflict,' said George Catrambone, head of fixed income at DWS Americas. Policymakers will also have to consider the August CPI reading before the September decision, as well as a report on producer prices due Thursday. After the Fed held rates last month, Powell reiterated that officials needed more time to gauge the impact of tariffs before cutting rates, signaling patience in the face of Trump's relentless pressure on him to lower borrowing costs. However, Governors Christopher Waller and Michelle Bowman — both appointed by Trump — dissented, favoring an immediate rate reduction because of labor market weakness. If the president's economic adviser Stephen Miran is approved by the Senate to become a Fed Governor, that'll be one more dovish voice in the room, according to JPMorgan. What Bloomberg strategists say... 'The market is still pricing closer to two rate cuts this year than three, though September is discounted as something close to a done deal. To meaningfully sway that, it would probably take an upside surprise not only on tomorrow's inflation figure, but also on the August payroll figures to be released on Sept. 5.' — Cameron Crise, Markets Live. Click here for the full analysis. Despite forecasts showing that price growth will remain above the Fed's 2% target, Vanguard Asset Management's Roger Hallam expects rate-setters to focus on signs of a shaky job market, barring a big upside inflation shock. 'When push comes to shove, the Fed would prioritize the labor market in anything other than extreme inflation scenarios,' said Hallam, the firm's global head of rates. The labor market has shown enough softness that 'the probability of easing in September has gone up a lot,' he said. --With assistance from Edward Bolingbroke. More stories like this are available on

US Treasury keeps notes, bonds auction sizes steady, increases debt buybacks
US Treasury keeps notes, bonds auction sizes steady, increases debt buybacks

Yahoo

time30-07-2025

  • Business
  • Yahoo

US Treasury keeps notes, bonds auction sizes steady, increases debt buybacks

By Gertrude Chavez-Dreyfuss NEW YORK (Reuters) -The U.S. Treasury Department said on Wednesday it does not anticipate increasing auction sizes for notes and bonds for at least the next several quarters, in line with market expectations, as it announced a $125 billion refunding from August to October 2025. It will, however, continue to make incremental increases to the size of Treasury Inflation-Protected Securities (TIPS) and T-bill auctions. "We use T-bills as a shock absorber for unexpected, seasonal or short term variations in borrowing needs as part of our regular and predictable issuance plan," a senior Treasury official said in a call with reporters on Wednesday. "That's because we believe ... changes in borrowing needs and addressing them in the people market is the most effective way to borrow at the least cost over time because of the ability of that market to absorb those kind of short-term changes. We think that the level of bill issuance offered today is very consistent with those plans and has helped us in light of the changes." In a statement, department will further sell $58 billion in U.S. three-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds next week. These were the same auction sizes for the same securities announced at the February refunding. The Treasury also announced it will double the frequency of long-end nominal buybacks and increase the size of cash management buybacks, all aimed at improving liquidity in the market. The changes to the buybacks will take effect on August 13. "The Treasury will be focusing more on bill supply and they are trying to help market liquidity by increasing the sizes and frequency of buybacks, especially in the long end of the curve," said Gennadiy Goldberg, head of U.S. rates strategy, at TD Securities in New York. "So net net, this should be slightly positive for the long end." Long-dated Treasuries briefly rallied after the refunding announcement, pushing their yields lower. But their yields were last higher on the day as the initial impact from the refunding was muddied by the strong U.S. gross domestic product number. U.S. 10-year yields were last up 4.4 basis points at 4.372%. The Treasury announced that it's increasing the frequency of liquidity support buybacks in both the 10- to 20-year and 20- to 30-year nominal buckets to four times per quarter from two currently. But it will keep the current $2 billion maximum purchase per operation in both sectors. With respect to the other nominal coupon pairs, the department will continue to conduct one liquidity support operation per quarter for up to $4 billion. All told, the changes will lift total size of liquidity support buybacks from a maximum par amount of $30 billion per quarter to $38 billion. CASH MANAGEMENT BUYBACKS The Treasury is also increasing the size of cash management buybacks from a maximum $120 billion per year to $150 billion. For this quarter, however, it does not expect conducting cash management buybacks around the September tax date due to the ongoing rebuilding of the Treasury's cash balance. Cash management buybacks will resume in December, the Treasury said. Overall, the Treasury's financing plan will refund about $89.8 billion of privately-held Treasury notes and bonds maturing on August 15 and raise new cash of $35.2 billion from private investors. The Treasury also stressed the focus on T-bill issuance this quarter. It expects further marginal increases in T-bill auction sizes in coming days and then maintaining sizes at or near those levels through the end of September. It added that further increases in T-bill auction sizes are anticipated in October. "This guidance (on T-bill issuance) will continue to be the focal point of future refunding announcements," wrote Tom Simons, chief economist at Jefferies in a research note. "(Treasury) Secretary (Scott) Bessent has made it clear that he is carefully considering the best strategy and timing for terming out the debt versus continuing to lean on the front-end. At some point, perhaps after a few Fed (Federal Reserve) rate cuts, issuance of more coupons will be more attractive." Median forecasts from primary dealers estimated that Treasury could increase bill supply by $260 billion over a month and by $600 billion over a quarter without causing significant price deviations in bills relative to fair value, according to minutes of the meeting on Tuesday of the Treasury Borrowing Advisory Committee released on Wednesday. With respect to TIPS, Treasury plans to maintain the 30-year TIPS reopening auction size at $8 billion for August, increase the 10-year TIPS reopening auction size to $19 billion in September, and increase the October 5-year TIPS new issue auction size to $26 billion. Sign in to access your portfolio

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