(Bloomberg) — Investors who have been hedging against a deeper sell-off in U.S. Treasuries are bracing for volatility as Friday’s hurricane and strike report provides the latest clues ahead of next week’s Federal Reserve policy decision.
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U.S. bonds rose in early trading on Friday after ending October with their worst monthly performance in two years. With the election and a Fed meeting just days away, a measure of daily yield swings is at its highest in a year as traders position for further losses that could push 10-year yields as high as 4.5 in the next three weeks. % could increase – compared to only currently less than 4.3%.
That positioning shows a robust U.S. labor market, according to government data released Friday, which is “hard for the market to ignore,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. While money managers can explain weak data as a byproduct of strikes and storms, a strong jobs report would take pressure off policymakers as they cut rates.
“I don’t think this Fed likes to surprise the markets too much,” he said. McIntyre expects a quarter-point cut at next week’s meeting, in line with most economists polled by Bloomberg, but expects they will send an aggressive message and “send a signal that they are done cutting for now.”
The sell-off in government bonds has pushed yields up by roughly 60 basis points last month, with losses partly fueled by unexpectedly strong employment data in September. Since then, volatility has increased in anticipation of the November 5 showdown between Donald Trump and Kamala Harris and uncertainty about the Fed’s policy path.
The ICE BofA Move Index, a closely watched gauge of volatility in U.S. bond markets, closed this week at its highest this year, showing traders are paying to protect themselves from increased turbulence. A notable flow on Thursday included a long-term volatility play for a $10 million premium via options tied to the Secured Overnight Financing Rate.
Traders estimate about a 90% chance that the Fed will cut rates by a quarter point next week – smaller than the half-point cut in September. Swap rates assume a total easing of approximately 117 basis points over the next twelve months, approximately 67 basis points less than early October.
