Bond traders seem to be just as confused as everyone else at the moment. This can be seen in JPMorgan Chase & Co.’s weekly survey of bond market participants published on Wednesday. It showed that the percentage of respondents who do not expect any change in prices and returns for US government bonds has risen to 74%, mostly since mid-2017. Only 25% expected government bonds to either rise or fall.
Of course, this may just be a sign that traders are stepping back and reassessing the landscape after the recent recovery in the bond market. But the market is always changing, and the percentage of traders who describe themselves as “neutral” has rarely approached the 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 implicit volatility measured by the ICE BofA MOVE Index. It rose to 156.2 from Tuesday. Not including the early days of the global pandemic, where the world was turned upside down, it is the highest since the global financial crisis more than a dozen years ago. You do not get these levels of volatility when traders are relatively confident in the outlook.
There is a lot to be confused about. The data coming out of the economy is as contradictory as ever. The talk of an impending recession has reached a fever level, but data released by the Ministry of Labor on Wednesday showed that job openings remained close to record highs in May, with employers having two jobs open to every job seeker. Also on Wednesday, the Institute for Supply Management’s index of services – which accounts for two-thirds of the economy – remained well in the expansionary area.
And yet, the Federal Reserve Bank of Atlanta’s broadly-followed GDPNow index, which aims to track the economy in real time, has fallen to minus 2.08% for the second quarter. If it turns out to be true, it would be the second consecutive quarter of contraction that meets the technical definition of a recession.
The outlook for inflation is just as muddy. The commodity market – a major driver behind the recent high inflation – has plunged in the last few weeks. Bloomberg’s commodity index has fallen by 19% since June 9, when energy, agriculture and industrial metals have all fallen sharply. The fall is one reason why break-even interest rates on five-year government bonds, which are a measure of what traders expect inflation to be over the life of the securities, have fallen to 2.50%, the lowest since September.
And yet, my Bloomberg News colleague Rich Miller reports that a broad index of inflation expectations, which Federal Reserve Chairman Jerome Powell marked as being partially behind the June jumbo rate hike, is expected to show a large increase when it is released on July 15, perhaps to a record. The general inflation expectations index includes more than 20 indicators that measure the attitudes of consumers, investors and professional forecasters to future price increases, Miller reported. The minutes of the Fed’s June political meeting released on Wednesday only increased the confusion. While policy makers agreed that interest rates may need to continue to rise for a longer period of time to prevent higher inflation from becoming entrenched, even though it slowed the economy, they also noted that some business contacts told them that employment and retention had improved , and that pressure for further wage increases appeared to be easing. In other words, who knows?
The government bond market has long been considered the most important thing in the world and what drives everyone else. Bond traders were once considered so powerful and omniscient that Tom Wolfe described them as “masters of the universe” in his 1987 classic novel “The Bonfire of the Vanities.” But these are not normal times. As we have witnessed time and time again, the unprecedented fiscal and monetary policy of the last two years has made fun of even the best and smartest attempts to predict how markets and the economy would react. Recent uncertainty in the bond market shows that the trend is far from over. More from other authors on Bloomberg Opinion:
Believe it or not, the market has 3 silver liners: Mohamed El-Erian
• A ‘Reverse Ferrett’ Gets Up Markets’ pants: John Authers
• Housing stands in the way of September Fed Pivot: Jonathan Levin
This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.
Robert Burgess is the managing editor of Bloomberg Opinion. Previously, he was the Global Chief Financial Officer for Bloomberg News.
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