Critical 2 Weeks Ahead for US Bond Market After Heavy Sell-Off

The U.S. bond market has suffered its worst sell-off in six months and is now entering a crucial two-week period that could determine its trajectory for the remainder of the year. A series of events affecting the market have come in rapid succession, starting with the U.S. Treasury's announcement on Wednesday of the upcoming issuance of Treasury bonds, followed by the monthly non-farm employment data released on Friday, which will show whether the economic cooling has been sufficient to justify further rate cuts.

The following week brings even more significant events: the Federal Reserve's first meeting since it began easing monetary policy in September. Alex Chaloff, Chief Investment Officer at Bernstein Private Wealth Management, stated, "The risks in the coming weeks are indeed escalating." U.S. Treasury prices have plummeted over the past month due to the continued strength of the economy, which has raised questions about the extent of the Federal Reserve's rate cuts in the coming months. Although the Fed began cutting rates by 0.5 percentage points last month, traders abandoned the once widely held prediction that the Fed would continue to rapidly cut rates after data showed the economy expanding at a relatively fast pace. As a result, U.S. Treasury yields have surged significantly, raising borrowing costs across the market and leading to the first monthly decline in U.S. Treasuries since April. Sinead Colton Grant, Chief Investment Officer at Bank of New York Wealth, said, "So far, this has been such a significant cycle, and a lot could happen in the next two weeks." This series of major news events increases the risk that selling could intensify in the coming weeks. One sign is that traders are paying the highest premiums this year for options to protect their portfolios from a surge in U.S. Treasury yields. However, some upcoming events could also be beneficial for the bond market. The U.S. Treasury is expected to announce that it will keep its bond auction size stable in the upcoming quarter to avoid any supply pressure, although traders will also be closely watching for any signals of future trends. The Fed's preferred inflation indicator, PCE, is expected to show some easing of price pressures, and the Department of Labor is expected to report a decline in the number of job vacancies. On Friday, economists surveyed by Bloomberg estimate that the department will report that U.S. employers added 110,000 employees in October, down from 254,000, although the recent impact of hurricanes and the Boeing strike could distort these numbers. Chaloff from Bernstein said, "Any number as high as about 180,000 is just a magical number." He believes that a figure below this would be sufficient to support further easing by the Federal Reserve. If the data strengthens, the central bank "must think long and hard about what to do next." Other economic highlights in the next two weeks include the ongoing release of corporate earnings and a high-level meeting of an Asian powerhouse, which could also stir markets eager for new measures to boost the economy. Whether you prefer to focus on macro or micro, it might be a good idea to fasten your seatbelt this week. Five of the U.S. stock market's "seven giants" will report earnings from Tuesday to Thursday, along with Eli Lilly, and six of the S&P 10's largest constituent companies have released market-moving news. Add the PCE data, of course, and Friday's employment figures, and it's a potent mix of potential volatility.

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