Global Bond Market Braces for Data Deluge After US Government Shutdown

Global Bond Market Awaits the Storm

The world's largest bond market is currently experiencing a period of relative calm, but traders are anticipating a dramatic shift once the US government shutdown concludes. A deluge of crucial economic data, delayed by the shutdown, is expected to flood the market, potentially triggering significant volatility. Since the US government shutdown began last week, expected volatility in US Treasuries has declined markedly, primarily due to the postponement of the highly important official jobs report. Furthermore, the Federal Reserve's next policy meeting is just weeks away. Once statistical data resumes publication, this $30 trillion market is poised to experience a period of intense volatility. The government shutdown may also complicate data collection. Options activity suggests that traders are hedging against various scenarios the Federal Reserve might take before the end of the year. The key question is: Does overheating inflation or a cooling labor market pose a greater challenge to policymakers when deciding whether to ease monetary policy again? "The longer the shutdown goes, even if it lasts another week, you have to question the quality of the October economic data, which makes it harder for both the Fed and markets to interpret the potential economic health," says Jack McIntyre, portfolio manager at Brandywine Global Investment Management. He added, "So, yes, things could get tense."

The Calm Before the Storm

Currently, the US Treasury market is calm, with Treasury yields remaining within a well-defined range. This calm is attributed to the data vacuum, leading to widespread expectations that the Federal Reserve will implement two more rate cuts of the same magnitude (25 basis points) before the end of the year, following the 25 basis point rate cut last month (the first this year). The Fed will hold another meeting in December after the October meeting.

What to Expect After the Shutdown Ends

This year's market reactions to the nonfarm payroll and CPI reports illustrate what to expect once the government shutdown ends. These reports have triggered some of the largest movements in the bond market in recent months. For instance, compiled data shows that the 2-year Treasury yield has fluctuated by an average of about 10 basis points on the day of the nonfarm payroll report release and approximately 5 basis points on the day of CPI data release over the past year. By comparison, the average daily fluctuation of the 2-year Treasury yield has been less than 4 basis points on all other days over the past year. The jobs data scheduled for release on October 3rd has been postponed. Now, traders are focusing on the CPI data scheduled for release on October 15th. The Federal Reserve adjusted its policy last month against a backdrop of weakening jobs, but as inflation remains above target, some officials have urged caution regarding further rate cuts.

Potential Market Volatility

"If the issue is resolved by next Thursday, we will receive CPI data and nonfarm payroll reports simultaneously, and if there are outliers, it could lead to sharp price fluctuations, and these outliers may be mixed," says Gregory Faranello, head of US interest rate trading and strategies at AmeriVet Securities. According to Morgan Stanley's interest rate strategists, last week's options pricing showed that traders are preparing to deal with a government shutdown that could last up to 29 days. A prolonged stalemate may limit the government's ability to fully collect data for the October jobs report scheduled for release in early November. As a result, this data may be more difficult to interpret, making it harder for the bond market to figure out the impact on the Federal Reserve. Liz Ann Sonders, chief investment strategist at Charles Schwab, points out that: "The question will be the October jobs report, especially if the government is still shut down this week, a large portion of the data in the October jobs report will become less clear due to the government shutdown." Option positions linked to Federal Reserve decisions show that traders are preparing for an extraordinary risk of only one more 25 basis point rate cut this year. Other deals consider the possibility of a 25 basis point rate cut and a 50 basis point rate cut. "The bond market currently widely believes that there will be a rate cut in October," says Kevin Flanagan, head of fixed income strategy at WisdomTree. He added, "We are all in a wait-and-see mode."