Bond Market Braces for Volatility Ahead of Fed Meeting and US Election

The US bond market is experiencing significant volatility as it approaches the Federal Reserve‘s meeting scheduled for November 7. On Monday morning, bond yields, particularly for the 10-year Treasury, remained elevated, hovering above 4.2%.

Experts are attributing this volatility to several factors, including the ongoing fiscal measures implemented during the post-COVID recovery, which have strengthened the economy but also introduced considerable uncertainty. Arnim Holzer, a global macro strategist at Easterly EAB Risk Solutions, noted that while there are long-term concerns about debt levels, the enhanced economic base is contributing to the uncertainty surrounding the Federal Reserve’s potential actions.

Adam Coons, Chief Investment Officer at Winthrop Capital Management, highlighted the impact of the upcoming US election and the Federal Reserve’s interest rate reductions on market volatility. Coons emphasized that investors are becoming increasingly cautious as the year draws to a close, given the remarkable performance of the markets so far. He suggested that investors consider reducing exposure and adopting more defensive strategies, such as selecting lower beta and lower volatility stocks, focusing on high-dividend equities, or slightly increasing allocations to fixed income.

Priya Misra, JPMorgan Core Plus Bond ETF portfolio manager, echoed similar sentiments, stating that the bond market is trying to take some risk off the table. This risk aversion is driven by the convergence of multiple unpredictable events, including geopolitical tensions and the upcoming election.

Despite the current volatility, some strategists remain optimistic about the bond market. Coons identified the bond market as his strongest conviction trade, arguing that the chances of interest rates climbing significantly from current levels are slim. He believes that stable or declining interest rates would likely enhance bond prices.