Bond traders seem to be as confused as anyone right now. This can be seen in JPMorgan Chase & Co.’s weekly survey of bond market participants released Wednesday. It showed the percentage of respondents expecting no change in prices and yields of US Treasury securities jumped to 74%, the most since mid-2017. Only 25% expected Treasuries to rise or fall.
Of course, this may just be a sign that traders are taking a step back and reassessing the landscape after the bond market’s recent rally. But the market is always on the move, and the percentage of traders who describe themselves as “neutral” has rarely approached its current level, having averaged 55% over the past five years. In short, traders have no conviction.
Such an assessment is supported by an increase in implied volatility as measured by the ICE BofA MOVE Index. It climbed to 156.2 on Tuesday. Excluding the early days of the global pandemic, when the world was turned upside down, it’s the highest since the global financial crisis more than a dozen years ago. You don’t get these levels of volatility when traders are relatively confident in the outlook.
There are many things to confuse. The data coming out of the economy is more contradictory than ever. Talk of a looming recession has come to a head, but data released Wednesday by the Labor Department showed job openings remained near record highs in May, with employers having two open positions for every job seeker . Also on Wednesday, the Institute for Supply Management’s services index – which accounts for two-thirds of the economy – remained well in expansion territory.
And yet the Federal Reserve Bank of Atlanta’s widely followed GDPNow index, which aims to track the economy in real time, fell to minus 2.08% in the second quarter. If true, it would be the second consecutive quarter of contraction, meeting the technical definition of a recession.
The outlook for inflation is equally hazy. The commodity market – a big driver of recent high inflation rates – has fallen in recent weeks. The Bloomberg Commodities Index has fallen 19% since June 9, with energy, agriculture and industrial metals all seeing steep declines. The fall is one reason why break-even rates on five-year Treasury bills, which are a measure of what traders expect the rate of inflation to be over the life of the securities, have fell to 2.50%, the lowest since September.
And yet my colleague from Bloomberg News, Rich Miller, reports that a broad index of inflation expectations that Federal Reserve Chairman Jerome Powell has pointed to as being partly responsible for the huge rise in June interest rates are expected to show a sharp increase when released on July 15, possibly until a record. The Common Inflation Expectations Index includes more than 20 indicators that measure the attitudes of consumers, investors and professional forecasters toward future price increases, Miller reported. While policymakers agreed that interest rates may need to keep rising for longer to prevent higher inflation from taking hold, even if it slows the economy, they also noted that some business contacts have told them that hiring and retention had improved and pressure for additional salary increases appeared to be easing. In other words, who knows?
The Treasuries market has long been considered the most important in the world and the one that drives all the others. Bond traders were once considered so powerful and all-knowing that Tom Wolfe described them as “masters of the universe” in his classic 1987 novel “The Bonfire of the Vanities.” But these are not normal times. As we have seen time and time again, the unprecedented fiscal and monetary policies of the past two years have driven even the best and brightest crazy trying to predict how markets and the economy will react. The recent uncertainty in the bond market shows that the trend is far from over. More other writers at Bloomberg Opinion:
• Believe it or not, the market has 3 silver linings: Mohamed El-Erian
• “Reverse Ferrett” pants hit the market: John Authers
• Housing impedes September Fed pivot: Jonathan Levin
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Robert Burgess is the editor of Bloomberg Opinion. Previously, he was Global Editor of Financial Markets for Bloomberg News.
More stories like this are available at bloomberg.com/opinion