This week is a critical week for the bond market as 10-year Treasuries yields are trading above the 2.4% level that has been cited by Bill Gross of Janus as signaling a bear market. This sentiment was reinforced by Jeffrey Gundlach of DoubleLine’s comments when he called this “the moment of truth” for bonds. During the week, several key factors could significantly impact the near term movement of yields.
Nov. 1 will be a big day for bonds with three key announcements expected. First, the Federal Reserve (Fed) holds its November Open Market Committee meeting. While it is widely expected that the Fed holds rates unchanged, we may get some additional insight on a potential December rate increase. Second, the Treasury Department will announce its plans to increase the supply of Treasury securities as part of its upcoming refunding announcement on Nov. 1. It is expected that the increase will be in the size of bill auctions but look for any increases in longer maturity auctions or signals of possible issuance of new ultra long Treasury bonds. Any surprise on this front will push yields sharply higher in the short term. Third, the House is expected to announce details on the tax reform legislation that is being targeted to spur economic growth.
The administration is also expected to officially name the next Fed Chair this week. As I wrote last week, I still expect Jerome Powell to be named the next Fed Chair. On Friday, the October employment report will be announced and I anticipate it will continue to show a robust labor market.
With all of these market moving events happening this week and a bond market that has defied many in its lack of upward volatility in rates, I do expect this to be a key week. My bias is to remain defensive on fixed income assets in this environment.
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