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Top Two Threats to the Treasury Market’s Big Year Are Converging

Emily Barrett

(Bloomberg) -- Two serious threats to this year’s stellar performance in Treasuries are closing in on the market: steps toward a U.S.-China trade deal and a light at the end of the Brexit tunnel.

Treasury yields took flight this week on hints of a partial trade pact, and late Friday President Donald Trump said he and his counterpart Xi Jinping could sign an accord as soon as next month. Prospects for a deal between the U.K. and European Union also looked firmer, as the EU’s chief negotiator signaled readiness to delve into the details of an Oct. 31 exit.

All year, investors have known that the case for Treasuries largely hinged on these major geopolitical quandaries. Now, credible progress on both could catch Treasury bulls seriously offside, and derail a market on track for its best annual return since 2011.

If a worst-case scenario is no longer in play, global growth could improve, the Federal Reserve could be less inclined to ease, and yields in major government bond markets could have more scope to rise.

“There was a decent long in the market that is going to get tested,” said Gary Cameron, portfolio manager at Garda Capital. “I don’t think we have a bear market, but the buy-dips environment we’ve been in since last September is late stage.”

Cameron expects that if this week’s positive signals are sustained, the U.S. 10-year yield could hit 1.90%. The benchmark ended Friday at 1.73%, after rising 20 basis points this week, its second-biggest sell-off this year. Moreover, traders in futures markets have been paring back their wagers on further Fed easing. Pricing of fed fund contracts show that the odds of a cut this month have gone from near-certain to close to a coin flip.

Investors will get plenty of live feedback from central bankers on how they’re viewing the geopolitical landscape next week. Highlights will be toward the back end, with speeches from New York Fed President John Williams and Vice Chairman Richard Clarida, who’s signaled openness to a further easing this year. Both have emphasized the Fed’s data-dependent stance.

Foremost among the potentially market-moving economic reports on the way is retail sales, which investors will watch for confirmation that consumption can continue to support U.S. growth. Economists are looking for Wednesday’s report to show a 0.3% monthly increase in spending for September, slowing from 0.4% the prior month.

“Retail sales will be pretty important,” said Cameron, adding that “the U.S. is the last bastion of reasonable growth it seems in the world right now.”

What to Watch

Monday is Columbus Day, a recommended holiday for the U.S. bond market.Here’s the economic calendar:Oct. 15: Empire manufacturingOct. 16: MBA Mortgage applications; retail sales; NAHB housing market index; business inventories; Federal Reserve Beige Book; Treasury International Capital flowsOct. 17: Building permits; housing starts; Philadelphia Fed business outlook; initial jobless claims; industrial/manufacturing production and capacity utilization; Bloomberg consumer comfort; Bloomberg economic expectationsOct. 18: Leading indexFed speakers are prevalent:Oct. 15: St. Louis Fed’s James Bullard; Atlanta Fed’s Raphael Bostic; Kansas City Fed’s Esther George; San Francisco Fed’s Mary DalyOct. 16: Chicago Fed’s Charles Evans; Dallas Fed’s Robert Kaplan; Fed Governor Lael BrainardOct. 17: Evans, Governor Michelle Bowman; New York Fed’s John WilliamsOct. 18: Kaplan; George; Vice Chairman Richard ClaridaHere’s the Treasury auction schedule:Oct. 15: $45 billion of 3-month bills; $42 billion of 6-month billsOct. 17: 4- and 8-week bills; $17 billion 5-year TIPS reopening

To contact the reporter on this story: Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker, Mark Tannenbaum

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