Premarket Stocks: The bond market is starting to worry Wall Street

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Persistently high inflation, tightening Federal Reserve policy and record-breaking US debt have wreaked havoc on US Treasuries this year.

Now, economists are noticing a fundamental and worrying imbalance in the bond market. Trillions of dollars in bonds are said to be for sale, but there is a growing shortage of buyers. If this trend persists, it could lead to credit problems and inhibit the US government’s ability to finance itself. That’s especially troubling after America’s national debt rose north of $31 trillion for the first time on Monday.

What’s happening: US bond prices rose along with stocks this week as investors, buoyed by a loosening of the labor market, bet that the Federal Reserve could ease off aggressive rate hikes sooner than expected. The upward trend brought temporary relief to the bond market, which is in the midst of a historically harrowing year.

But that relief may be short-lived. US Treasuries – backed by the US government and considered the safest of bonds – are suffering from what JPMorgan analysts describe as “lack of demand and structure”.

JPMorgan strategists led by Jay Barry and Srini Ramaswamy wrote that the three main buyers of US government debt — the Federal Reserve, commercial banks and foreign governments — have significantly eased their purchases.

Using data from the Federal Reserve, the collective holdings of commercial banks fell by $60 trillion in the last six months compared to the same period last year, after growing by more than $700 trillion between 2020 and 2021. The official participation of foreign governments has declined. 50 billion dollars in the last six months. The Federal Reserve, on the other hand, has dropped about $180 trillion this year as part of its money-tightening program to combat inflation and cool the economy.

The Fed’s move was expected. At the start of the Covid-19 pandemic, growth slowed and the Fed began buying $120 trillion in government-backed bonds every month as a way to pump money into the economy. Now, the central bank has reversed course.

However, in general, the decrease in demand for Treasurys is exceptional.

“The reversal in demand has been surprising, as it has been rare for demand from each of these three types of investors to be negative at the same time,” Barry and Ramaswamy wrote.

What’s next: Investors will be paying close attention to unemployment numbers this Friday. If unemployment rises, the Fed may signal that it will ease back on rate hikes. That’s good news for the bond market. If unemployment remains low, Treasury withdrawals could continue.

As bond prices fall, yields rise, and the cost of borrowing for the government rises.

Prices at the pump could rise again this winter.

OPEC+, the Organization of the Petroleum Exporting Countries and a group of non-OPEC members led by Russia will meet today to discuss energy markets and could agree to cut oil production in the wake of the recent drop in oil prices.

That’s a pretty big deal. OPEC is responsible for almost 40% of the world’s oil supply.

Analysts expect some in OPEC+ to advocate for enough supply cuts to bring oil prices back to $90 a barrel. On Tuesday, prices hovered around $86 per barrel of Brent crude, the international benchmark. About a quarter of the way through June.

The supply shift could add more pain to Europe’s already battered economy: Russia’s war on Ukraine has already severely limited energy supplies in Europe. The German and UK governments have just announced expensive interventions to limit bills this winter and avoid a heating crisis.

Oil prices in the United States are also high today as hurricanes raise concerns about supply disruptions.

Brent rose nearly $3 a barrel on Tuesday. Wednesday was steady ahead of the meeting.

The tight US labor market began to show signs of loosening in August, reports colleague Alicia Wallace.

The number of job openings fell to just under 10.1 million, down from 11.2 million in July, according to data released by the Bureau of Labor Statistics on Tuesday. That’s the lowest total since June 2021.

The latest Job Openings and Labor Turnover Survey, or JOLTS, showed that the decline in available jobs — the biggest monthly decline since April 2020 — now means there are now nearly 1.7 open positions for every person looking for one, down from two jobs per job. search engine in July.

That’s welcome news for the Federal Reserve, which wants a slower labor market because tight employment could push up wages and ultimately lift inflation.

But while the latest payroll data appears to be showing some evenings in a historically tight labor market, there’s still a long way to go.

What’s next: JOLTS is the first of several key labor market reports this week: ADP’s private sector payrolls and wages report is due Wednesday; The Labor Department’s latest weekly jobless claims on Thursday; and the September jobs report on Friday.

All could have a big impact on the Fed’s next policy meeting in early November.

The ISM Services September PMI, an indicator of the general economic condition of the US services sector, was released at 10 am.

The September ADP National Employment Report is released at 8:15 am. The release, two days ahead of government data, is largely used to forecast official US unemployment numbers.