The bond market is starting to worry Wall Street
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
Persistently high inflation, the Federal Reserve’s tightening policy and record-breaking US debt have wreaked havoc on US Treasuries this year.
Now, economists are noting a fundamental and worrisome imbalance in the bond market. There are trillions of dollars worth of bonds for sale, they say, but a growing scarcity of buyers. If this trend persists, it could lead to credit problems and inhibit the US government’s ability to fund itself. That’s particularly concerning after America’s national debt climbed north of $31 trillion for the first time on Monday.
What’s happening: US bond prices rallied alongside equities this week as investors, spurred on by a loosening labor market, bet that the Federal Reserve could ease its aggressive rate hike policy earlier than expected. The upward swing brought some temporary relief to the bond market, which is in the midst of a historically awful year.
But that relief may be short-lived. The US Treasury — backed by the US government and considered the safest of bonds — is experiencing what JPMorgan analysts describe as a “structural absence of demand.”
JPMorgan strategists, led by Jay Barry and Srini Ramaswamy, write that the three main buyers of US government debt — the Federal Reserve, commercial banks and foreign governments — have significantly eased up on their purchases.
Using Federal Reserve data, they found that commercial banks’ collective holdings have fallen by $60 billion over the last six months compared to the same period last year, after growing by more than $700 billion between 2020 and 2021. Foreign governments’ official holdings have dropped $50 billion over the past six months. The Federal Reserve, meanwhile, has dropped its Treasury holdings by about $180 billion so far this year as a part of its monetary tightening program to fight inflation and cool the economy.
The move by the Fed was expected. At the onset of the Covid-19 pandemic, growth slowed and the Fed began purchasing $120 billion in government backed bonds each month as a way to inject money into the economy. Now, the central bank has reversed course.
Still, overall, the drop in demand for Treasuries is extraordinary.
“The reversal in demand has been stunning as it has been rare for demand from each of these three investor types to all be negative at the same time,” wrote Barry and Ramaswamy.
What’s next: Investors will pay close attention to unemployment numbers out this Friday. If unemployment grows, it could signal the Fed will ease on its rate hikes. That’s good news for the bond market. If unemployment continues to remain low, the retreat from Treasuries could continue.
As bond prices tumble, yields rise, raising the cost of borrowing for the government.
Prices at the pump could rise again this winter.
OPEC+, the Organization of the Petroleum Exporting Countries and a group of non-OPEC members led by Russia, will meet today to discuss energy markets and could agree to cut oil production because of the recent fall in oil prices.
That’s a pretty big deal. OPEC is responsible for nearly 40% of the world’s oil supply.
Analysts expect that some in OPEC+ will advocate to limit supplies enough to bring the price of oil back up to $90 a barrel. Prices on Tuesday hovered around $86 for a barrel of Brent crude, the international benchmark. That’s down by about a quarter since June.
The possible supply shift could add more pain to an already ailing European economy: Russia’s war on Ukraine has already significantly constrained energy supplies in Europe. The German and UK governments recently announced pricey interventions to cap bills and prevent a heating crisis this winter.
Oil prices in the United States are also currently elevated as hurricanes introduce concerns over possible disruptions of supply.
Brent rose by nearly $3 a barrel on Tuesday. It was steady Wednesday ahead of the meeting.
The tight US labor market started to show signs of loosening in August, reports my colleague Alicia Wallace.
The number of job openings dropped to just under 10.1 million, down from 11.2 million in July, according to data released Tuesday by the Bureau of Labor Statistics. That’s the lowest total since June 2021.
The latest Job Openings and Labor Turnover Survey, or JOLTS, showed that the decrease in available jobs — the largest monthly decline since April 2020 — means that there are now almost 1.7 positions open for every person looking for one, down from two openings per job seeker in July.
That’s welcome news to the Federal Reserve, which wants more slack in the labor market out of concern that tight employment could push up wages and ultimately keep inflation elevated.
But while the latest turnover data appears to be showing some evening out in a historically tight labor market, there’s still a long way to go.
What’s next: JOLTS is the first of several key labor market reports coming out this week: ADP’s private-sector payroll and wage report will be released on Wednesday; the Labor Department’s latest initial weekly jobless claims on Thursday; and the September jobs report on Friday.
All could factor heavily into the Fed’s next policy making meeting in early November.
ISM Services September PMI, an indicator of the overall economic condition for the services sector in the US, is released at 10 a.m. ET.
The ADP National Employment Report for September is released at 8:15 a.m. ET. The release, two days ahead of government data, is largely used to predict official US unemployment numbers.