Bond traders are getting cranky with Washington, Europe and the Fed, all at the same time.
The Treasury market was well bid Tuesday, even ahead of $62 billion in auctions this week. Ordinarily Fed officials talking hawkishly might get more notice, but the market totally ignored Philadelphia Federal Reserve President Patrick Harker, a voting member who said Monday he believes the Fed should consider a rate hike in March.
“The bond market is cranky about Washington. I think that’s the main driver. The Fed has limited credibility in terms of its hawkishness … there are things in the economy that are doing better … but there’s skepticism about Washington and there’s skepticism about Trump and there’s some discomfort with him,” said David Ader, chief macro strategist at Informa Financial Intelligence.
“You can’t hedge uncertainty and Washington is giving us uncertainty,” said Ader.
Treasurys sold off temporarily in early trading Tuesday as the dollar strengthened on Harker’s comments, but buying resumed and was stronger at the long end of the curve. San Francisco Fed President John Williams also made hawkish comments Friday, and the market sold off temporarily.
The market remained well bid after the 1 p.m. ET $24 billion three-year note auction, which yielded 1.423. The three-year is more sensitive to the Fed and was trading with a yield of 1.40 percent post-auction.
“I think there are general concerns with what’s going on with Europe. We’re seeing weakness just generally in European bonds. Now there’s questions about when we’re going to get the full effect of (U.S.) tax reform. While they wanted it in 2017, we might not get it until 2018,” said Peter Boockvar, chief market analyst at The Lindsey Group.
Markets have reacted to worries about the upcoming French election. Candidate Marine Le Pen would like to drop the euro, and that has created a skittishness in sovereign bonds across Europe.
There has also been an undercurrent of growing concern that the timing of President Donald Trump policies that have been behind the rally in stocks are being pushed back. Trump’s comments in a television interview this weekend that Obamacare might not be replaced until next year has sent ripples through the markets this week.
House Speaker Paul Ryan on Tuesday said the bill for Obamacare replacement would be voted on before the end of the year.
Boockvar said the market senses that tax reform would be delayed as a result of a possible delay on health care. The House has been expected to start talking about tax legislation in the spring.
“The problem with the delay in tax reform is it will have a direct impact on the economy. Decisions on spending will be put off,” said Boockvar.
“The strength of Treasurys of late coincides with the strength in gold,” he said, noting that yields have been falling as concerns have been growing. Gold has been risingin a safety trade, as investors also worry about Trump’s trade policies, and Boockvar said gold and Treasurys have served as safe havens along with German bunds.
Treasury strategists say the bond market could chop around until next week, when Fed Chair Janet Yellen appears before Congress on Tuesday and Wednesday. Despite Harker’s comments, the markets believe the central bank will not act on interest rates until its June meeting. Traders had expected to see the Fed sounding a little more aggressive on rate hikes when it met last week.
“The window for them to jawbone the market is closing. That’s the crux of what we need to see in the next few weeks to get the right response. If it’s not March, maybe May becomes a little more alive,” as a time for a rate hike, said Aaron Kohli, director, fixed income strategy at BMO Capital Markets.
Kohli said he sees the potential for more buying in Treasurys, and the 10-year has now broken an important level at 2.39 percent.
“From a technical formation, it looks like if you break that, you’ve accelerated the rate of yield descent. There’s some sense out there you could have a runaway rally,” he said. “Markets are short, and if you start to see a yield move, it could pick up steam.”
Kohli said the $23 billion 10-year auction may see even stronger demand Wednesday as a result.
John Briggs, head of strategy at NatWest Markets, said the 10-year yield could retreat to the 2.30 to 2.35 percent area.
“Yellen is next week. So what’s going to entice you to put capital to work right now, and we’re in fiscal limbo and any large decisions you make can get turned around,” he said.
Meanwhile, Minneapolis Fed President Neel Kashkari said Tuesday on a blog that the economy has not reached the point in terms of inflation and employment that would necessitate aggressive monetary policy.