US Bond Markets Face Possible Repeat of April Crash: Déjà Vu Looming?
As the US jobs report for Friday approaches, markets are closely watching for any clues about the Federal Reserve's (Fed) policy. This report, as mentioned earlier, is a key event for Fed policy.
The current state of the Treasury market is causing a resurgence of the question of whether history will repeat itself, as the April crash is being recalled. The rise in the yield on 30-year US Treasury bonds, which has nearly reached 5%, is due to concerns about US national debt and high inflation.
This rise in yield happened before it fell after a US jobs report that was weaker than expected. Traders almost fully priced in a Fed rate cut this month due to this weaker than expected report. However, the increase in volatility is due to uncertainty about the finances of the US government and fears that upcoming employment data could dash expectations of a rate cut by the Fed.
The spending and tax-cut plans of the Trump administration are likely to further worsen the finances of the country, unless tariff revenues are sustainable. President Donald Trump has expressed a desire to gain more control over the Fed, such as his push to remove Governor Lisa Cook. This poses a major challenge to the Fed's independence and could undermine financial market stability globally.
The rise in volatility is also reminiscent of the April crash, a day that Donald Trump once dubbed "Liberation Day". Bonds with maturities over ten years suffered their largest monthly loss in a decade in September, with the implied volatility for one-month Treasury bonds surging to its highest level since April 2, 2021.
Markets are showing signs of nervousness, with concerns about the independence of the Federal Reserve rising. The blackout period ahead of the September 17 rate decision is also a key event for Fed policy, as mentioned earlier.
Shinji Kunibe, head of global fixed income portfolio management at Sumitomo Mitsui DS Asset Management Co., stated that they remain very flexible in terms of overall direction. Kunibe added that if one thinks too short-term, one risks getting squeezed out of the market, so they're not taking on a lot of directional risk.
Concerns about the Fed's independence are reflected more in yields, gold prices, and stock prices than in currencies, according to strategists at JPMorgan. These concerns are further amplified by the ongoing efforts of President Trump to change the Fed's independence.
In conclusion, the upcoming US jobs report and the blackout period ahead of the September 17 rate decision are critical events for Fed policy. The rise in volatility in US Treasury bonds underscores the uncertainty and potential risks in the market, as markets closely watch for any indication about the Fed's policy direction.
