- The US Treasury Department announced a bigger-than-expected sale of 30-year bonds.
- Reports on Thursday revealed that Trump would not attack Iran before the midterm elections.
- Traders are eagerly awaiting next week’s CPI report.
Interest futures recovered on Thursday after a successful 30-year bond auction. At the same time, Trump said he would not bomb Iran until after the midterm elections, easing concerns about higher fuel prices and hotter inflation. However, underlying fundamentals still indicate further downside for bonds.
The US Treasury Department announced a bigger-than-expected sale of 30-year bonds, indicating solid demand. Although demand is still relatively weak, the increase was enough to boost interest futures. Meanwhile, Treasury yields pulled back from their multi-decade highs.
Furthermore, reports on Thursday revealed that Trump would not attack Iran before the midterm elections, as he had initially said. The news eased concerns about higher oil prices and Treasury yields. As a result, bonds got some relief. However, the US president still plans to resume attacks after November. This means the risk premium on oil remains.
Fortunately, market participants are slowly coming to terms with the likelihood of a prolonged war. Therefore, the volatility caused by sudden hostilities in the Middle East has dropped. Moreover, oil traders have found ways to bring their commodity to global markets. Reports indicate that flows through the Strait of Hormuz have increased to near pre-war levels despite the ongoing conflict.
Consequently, oil prices have pulled back, and inflation worries have eased. However, central banks will likely remain on high alert as things can escalate suddenly. Market participants expect the Fed to pause in October after last week’s data showed weaker-than-expected job growth in September. At the same time, the unemployment rate increased to 4.2%, above estimates of 4.1%.
Still, remarks from Fed officials indicate a hawkish outlook as the central bank works to lower inflation to its 2% target. This week, Chris Waller said more hikes are needed to tame inflation.
“The hikes do not need to come at consecutive meetings,” Waller told a Central Bank of Turkey forum in Istanbul. “But they should be in place in an acceptable period of time.”
US inflation expectations (Source: Bloomberg)
Higher borrowing costs will mean yields remain elevated and interest futures subdued. Traders are now eagerly awaiting next week’s CPI report, and expectations show higher inflation. Hotter-than-expected inflation would increase rate-hike bets, sending interest rate futures lower. The opposite is also true.
