Bond traders face their fears in week that may change everything

Bloomberg

This week is fraught with peril for Treasuries traders, no matter if they’re bulls or bears.
The next five trading days will bring a torrent of market-moving information: President Donald Trump is poised to finally announce his nominee to lead the Federal Reserve; US central bankers have an interest-rate decision to make; a House committee is set to release a tax bill; and Treasury will unveil plans to issue more debt to make up for lost funding from the Fed. Investors will also get the latest reading on the nation’s job market and the central bank’s preferred inflation gauge.
It’s a lot to digest. What’s more, it all comes at a pivotal time, with 10-year yields breaking above the crucial 2.4 percent level and touching a seven-month high of 2.48 percent. With yields entering a new, elevated range, traders are bracing for turbulence as they ponder the direction of the world’s biggest bond market for the remainder
of 2017.
“I would definitely expect those ranges to be tested in a big way,” said Michael Lorizio, a senior trader at Manulife Asset Management, which oversees $370 billion. “The information we get in the next week should allow people to feel more confident in their longer-term views, and more aggressively position for those views going into the end of the year.”
Signs are emerging that volatility is returning to fixed income, after it fell to a record low in August. Bank of America Corp.’s MOVE Index, which tracks swings in Treasury options, jumped last week to the highest in five months.
Commentary around higher yields may have added to the volatility.
DoubleLine Capital LP’s Jeffrey Gundlach called it “the moment of truth” for the bond market’s three-decade bull run after yields broke through 2.4 percent.
Bill Gross at Janus Henderson Group said this month that a
sustained move through that
level would signal the end of the 30-year rally.
The full slate of events ahead and the prospect of market turmoil could scare away buyers until the dust settles, Lorizio said.
Even investors who consider Treasuries oversold might prefer to wait, either for confirmation that yields will drop or for an even more attractive entry point.
“Given the big move in Treasuries, it would warrant some caution coming into the week,” said Alex Li, head of US rates strategy at Credit Agricole SA.
The latest read on positioning in futures markets indicates that restraint. Hedge funds and other large speculators cut back on bets against two- and five-year Treasury maturities in the week, after their net shorts reached record highs, Commodity Futures Trading Commission data show.
On the flip side, asset managers’ net duration across the Treasury curve dropped.
It’s a frightening week to take a big bet one way or the other.