Once
again, the markets are acting against common sense. One would think that, with
the highly optimistic GDP data recently released, investors would be alarmed by
the threat of another interest rate hike, but this is not the case.
The lack
of concern is not because people are confident that the Fed has managed to tame
inflation (it is still too early to say) but because there are doubts about the
figures released: How? Why? At whose expense?
It is
puzzling how the U.S. economy has grown 4.9% from 2.4%, while small-cap
companies continue to struggle. Also, why haven’t consumer stocks benefited
much from the sharp rise in consumer spending? Where has the money gone?
All of
that raises suspicions that things are not so rosy in reality and that someone
cleverly manipulated the deflator values down a couple of points to improve the
statistics. Let’s see if they revise the figures in the second reading.
There is
one more thing to consider: GDP does not consider income distribution within a
country. Therefore, even if money flows around the country, it does not mean
that everyone uses it equally. This situation leaves many unanswered questions.
As a
result, fears of a possible interest rate hike did not last long, and the yield
on ten-year US Treasury bonds did not stay above the 5% threshold for long. At
this writing U.S. Treasury yields declined as traders turned their eyes to the
two-day Federal Reserve meeting scheduled for October 31 – November 1, as the economic
data calendar suggests.
However,
the information campaign may have also played a role in raising sentiment.
First,
news that hedge fund manager Bill Ackman, often referred to in the media as one
of the top fixed-income bearish guys, closed his bets against Treasuries helped
the bond rally. Afterwards, analysts summed up the move.
Most
recently, an article appeared in Barron’s entitled “Stop Crying About
Bonds and Buy Them Instead,” suggesting that the bond market could regain
its safe haven status due to continued geopolitical turmoil or signs of recession.
Undoubtedly,
this will happen eventually, but no one knows precisely when. Therefore, it is
not wise to mindlessly follow everything you read on the Internet or listen to
the opinions of hedge fund managers. It is essential to think for yourself.
What
factors could push U.S. Treasury bond prices lower?
Starting
with the obvious: if the war in Israel starts and spreads throughout the Middle
East, causing a new wave of inflation, it could trigger a
backlash from Powell and company. At this point, however, the markets consider
such a scenario unlikely.
What is
less obvious, and what is usually forgotten: Treasury yields are not only
determined by monetary policy; the amount of debt securities sold on the market
by the Treasury Department also plays an important
role.
For
example, if members vote to increase the pace of bill, note and bond sales in
the fourth quarter above expectations to finance the growing budget deficit,
yields could rise. Given the soaring costs of servicing the national debt, it
could seem like only a matter of time.
Analysts
had even expected an increase in short-term securities issuance on Wednesday,
on the occasion of the publication of the Treasury’s “quarterly
redemption” statement. However, there has been an unforeseen development.
This
Monday, the Treasury lowered the debt forecast to $776 billion in the fourth
quarter, $76 billion less than forecast in July, partly thanks to the addition
of tax revenues from states that received natural disaster deferrals.
What’s
next?
Despite
the downward revision, the new forecast still means record borrowing volume in
the fourth quarter. Also, the Treasury can still deliver some surprises, and
yields could rise. In short, there are many factors to consider before lining
pockets with instruments like the TMF.