Treasuries Slip, Dollar Jumps in Wild Week for Traders
“Investors still have faith that the dollar itself, regardless of the state of the actual government, will continue to be the global currency of choice and keep value in a fraught political situation.”
Treasuries slipped and the dollar headed for its first weekly gain this month as traders wrapped up an eventful week, with lingering questions surrounding the U.S. presidential campaign and a major global IT outage.
Traders had built up wagers on Monday fueled by rising odds of a Donald Trump presidential win after an attempted assassination. Those bets have been slowly unraveling, though, as investors refocus on the timing of the Federal Reserve’s first interest-rate cut. Global software disruptions on Friday, meanwhile, weighed on demand for riskier assets.
The Bloomberg Dollar Spot Index advanced 0.5 percent this week, while U.S. yields climbed on concern that Trump’s fiscal and trade policies would spur inflation and growth. Benchmark two-year note yields climbed six basis points (bps) this week, to 4.51 percent, while 10-year yields were up to about 4.24 percent.
“Investors still have faith that the dollar itself, regardless of the state of the actual government, will continue to be the global currency of choice and keep value in a fraught political situation,” said Helen Given, a foreign exchange (FX) trader at Monex Inc.
Looking ahead, investors are on alert for any developments tied to mounting pressure on Joe Biden to drop his bid for re-election. While the president has vowed to return to the campaign trail, Trump is seen with a roughly 63 percent chance of winning in November, PredictIt data show.
“If we were to have a new Democratic candidate—which we don’t know at this point—and that did affect the prediction markets, we could see some related trading,” said Rebecca Patterson, who has served in senior strategy roles at Bridgewater Associates LP and is part of the Washington Speakers Bureau.
While the yield curve steepened sharply as markets reopened Monday after Trump was shot in the ear, the move has since lost momentum. Instead, traders refocused on the chances of Fed cuts as soon as September to reinvigorate the steepener bet.
Swaps traders see a September Fed cut as nearly certain, with implied yields on the contracts pricing in 24 bps worth of rate reductions. For all of 2024, traders expect two quarter-point cuts and about a 40 percent chance of a third.
The Fed’s policy meeting in September “is live,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle. He cautioned that “front-end pricing leaves no room for upside surprises to inflation or employment.”
Copyright 2024 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.