Dueling Fed comments and conflicting anecdotes about the jobs market are dovish one minute, hawkish the next.
That's what influenced the last day's activity in the bond market, and yields have moved higher, lower and higher in response. The market is so tethered to Fed policy that it has become a mirror of Wall Street's uncertainty about when the central bank will raise interest rates. This week it is especially on edge, reflecting anxiety ahead of Friday's monthly jobs report, one of the most important pieces of data the Fed will review before its September rate decision.
"I think the market wants to own up or get some clarification that we're going to get a hike," said David Ader, chief Treasury strategist at CRT Capital. The 2-year yield hit a high of 0.76 percent after the ISM nonmanufacturing survey Wednesday soared to 60.3, compared with an expected 56. There was also a 10-year high in the employment component of the survey, at 59.6. The yield was at about 0.74 percent at midday.
But earlier ADP data was disappointing, showing a gain of just 185,000 jobs, below the 215,000 expected. While not a clear proxy for the government's monthly employment report, it can shape expectations. Yields had moved lower on that.
The market was also keenly focused on the conflicting words of two Fed officials. Comments from Fed President Dennis Lockhart to The Wall Street Journal on Tuesday moved the bond market after he said that personally, he didn't see anything to stop the Fed from raising rates in September. But his hawkish tone was counterbalanced by Fed Gov. Jerome Powell who said on CNBC on Wednesday that the labor market looks solid, but he's undecided on whether the Fed should move to raise rates in September.
Lockhart's comments sent short term yields higher, as the 2-year is sensitive to Fed interest rate moves, but Powell's dovish remarks temporarily sent yields lower.
RBS head of strategy John Briggs said Lockhart's comments are resonating more with the market. "The difference is Lockhart did something he doesn't tend to do which is make a fairly strong statement in a direction that's not typically his," said Briggs. "That's quite a difference from where he has been."
Briggs said if Powell had made a similar statement it would have been a bigger signal, and the Fed probably does not want to make such a clear statement on rates. "It could be a smaller signal. ... They're planting the seeds through a moderate president. I don't know but there could be something to it. If Powell was to say the same thing, that would be a larger shock," he said.
The Fed may also have been sensitive to the weaker-than-expected employment cost index report last week, which reduced expectations for a September rate hike, he said.
Market focus is now on how the jobs report stacks up and whether it will be a strong enough piece of data to push the notion of a September rate hike, over a December increase, as widely expected in the market. "I'm more apt to think the risks are for a better number because of ISM services rather than a weaker number from ADP. Between Lockhart and overall data today, with more weight on the ISM number, that's basically the two things that are moving the market," Briggs said.
Strategists said the market was also focused on a release from the Treasury Borrowing Advisory Committee that said in light of low interest rates and borrowing needs, the Treasury should consider issuing more long-term debt. That sent yields higher at the long end of the curve—the 10-year and 30-year sectors.
"I think this kind of reaction from markets is what we're going to expect going forward. Time is ticking and whether the hike is in September or not, everyone is going to be on pins and needles. It's going to create this kind of environment where everyone is second guessing themselves—both the bulls and bears," said George Goncalves, head of rate strategy at Nomura.
Goncalves said the market is heavily influenced by positioning this week, and the market is coming up against auctions next week. "The fact we're focusing on things like (the Treasury release) just tells you the market is kind of thinking in general. It's trading off headlines. There's no conviction and people don't really have a good grasp of where we're going to head once the Fed does lift rates, and who's going to buy long term Treasurys."
The Treasury holds $64 billion in auctions next week, including $24 billion 10-year notes and $16 billion 30-year bonds.