If Bonds Aren’t Rallying, They’re Selling
At the risk of repeating a common thesis in recent days, bonds had a choice to make at the end of January. The decision was whether or not a rally of more than 100bps from October’s highs could be justified by the current state of data and Fed policy. Last week’s jobs report cast a clear vote and this week’s Fed speeches served as the “told ya so.”
It’s not the Fed had been telling the market that longer-term rates needed to be higher. Rather, the Fed has simply been reiterating the following points:
- It’s too soon to declare victory on inflation
- There’s still a real risk that inflation could bounce higher again
- The labor market is still way too tight to suggest any loosening of policy
- Wage growth has slowed, but not enough to remove concern over inflation
- Policy is barely restrictive right now and it needs to get more restrictive and stay that way for a few years, probably
While they’ve been consistent on those points, the market has been consistent in pricing-in an end to the rate hike cycle and even a probable rate cut by the end of 2023. In other words, the market and the Fed were at odds when it came to the rate outlook. It was staring contest and neither side had really blinked until this week.
When last Friday’s jobs report came out, markets feared a hawkish update from Fed Chair Powell in this week’s Q&A on Tuesday. He essentially took the opportunity to say the jobs report is just another piece of evidence that supports the Fed’s bullet points above. The rest of this week’s Fed speakers essentially said “yeah, that!” And here we are pushing the highest yields in more than a month. If rates can’t go any lower, they’ll go higher. Next week’s CPI report on Tuesday is the next big input on whether and how quickly the trend continues.