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The bond market’s reaction to the central bank this past week was unusually volatile.

In the approaching week, bond market professionals will be watching Powell and other member of the Fed for further cues.

“This is bonds’ — I wouldn’t call it day in the sun — it’s more like day in the tornado,” said Michael Schumacher, head of rate strategy at Wells Fargo. “Clearly the bond market is the one the equity market is watching right now, and normally that’s not the case.”

Stocks were lower on the week, with the Dow off about 0.5% and the S&P 500, down 0.7%. The Nasdaq Composite was off 0.8% for the week.

The Russell 2000, however, was hit the hardest, losing close to 3% for the week.

Yields ratcheted higher as the market sold off. Bond yields move inversely to price.

Powell speaks

Powell testifies Tuesday and Wednesday before Congressional committees along with Treasury Secretary Janet Yellen on Covid relief efforts and the economy.

He also speaks on central bank innovation at a Bank for International Settlements event Monday morning.

Other central bank speakers this week include Fed Vice Chairman Richard Clarida, Vice Chairman Randal Quarles, Fed Governor Lael Brainard, and New York Fed President John Williams.

Inflation and the Fed

Normally, the Fed would hike interest rates if inflation flared up to avoid an overheating economy and avert a bust cycle.

“For the bond market, and the Fed, there is a communications problem and there’s a consensus problem. There can’t not be tension,” said Diane Swonk, chief economist at Grant Thornton.

“They will be trying to clarify the Fed’s message, but without a consensus on what those numbers and guardrails mean, it will be hard,” she said. “They will be explaining themselves as economists, and they’ll be speaking a different language than the bond market speaks.”

Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, expects the bond market could be more volatile than stocks, and inflation would be problematic for both.

At some point, he expects there could be a 10% stock market correction, and inflation or a sharp move in bond yields could be a trigger.

Rotation from tech into cyclicals

Grohowski expects what he calls the ‘great rotation’ from tech and growth stocks into cyclicals and value to continue. Growth and tech have been most sensitive to rising rates, and the Nasdaq has corrected more than 10%.

“I think we’re in the sixth or seventh inning of a nine-inning game. It’s not over, but I think we’ve seen the lion’s share of the great rotation out of growth, into value,” said Grohowski. He said that view depends on the 10-year not rising much above 1.75%.

Grohowski is concerned by the Fed’s willingness to let inflation overshoot because inflation is a negative for stocks.

Bond market direction

Schumacher said there’s a chance the bond market could steady in the next couple of weeks, even if yields tick up.

He said corporate pension funds appear likely to reallocate capital into bonds before the end of the quarter March 31, and that could be supportive. Also as the Japanese fiscal year is set to begin, there could also be new buying in U.S. Treasurys because on a currency adjusted basis U.S. debt looks very cheap, Schumacher said.

He is also watching Treasury auctions in the coming week.

The Treasury auctions $60 billion 2-year notes Tuesday; $61 billion 5-year notes Wednesday, and $62 billion 7-year notes Thursday.

In particular, Schumacher is watching the 7-year auction, which drew poor demand last month.

Week ahead calendar

Monday

Earnings: Tencent Music Entertainment

9:00 a.m. Fed Chairman Jerome Powell at Bank for International Settlement summit

10:00 a.m. Existing home sales

10:00 a.m. Quarterly Financial Report

1:00 p.m. San Francisco Fed President Mary Daly

1:30 p.m. Fed Vice Chairman Randal Quarles

7:15 p.m. Fed Governor Michelle Bowman

Tuesday

Earnings: Adobe, IHS Markit, DouYu, GameStop, Steelcase

8:30 a.m. Current account

9:00 a.m. St. Louis Fed President James Bullard

10:00 a.m. New home sales

12:00 p.m. Fed Chairman Powell, Treasury Secretary Janet Yellen at House Financial Services Committee

1:00 p.m. Treasury auctions $60 billion 2-year notes

1:25 p.m. Fed Governor Lael Brainard

1:45 p.m. New York Fed President John Williams

3:45 p.m. Fed Governor Brainard

4:20 p.m. St. Louis Fed’s Bullard

Wednesday

Earnings: General Mills, Shoe Carnival, KB Home, RH, Tencent, Embraer, Winnebago

8:30 a.m. Durable goods

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

10:00 a.m. Fed Chairman Powell, Treasury Secretary Yellen at Senate Banking Committee

1:00 p.m. Treasury auctions $61 billion 5-year notes

1:35 p.m. New York Fed’s Williams

3:00 p.m. San Francisco Fed’s Daly

7:00 p.m. Chicago Fed President Charles Evans

Thursday

Earnings: Darden Restaurants

5:30 a.m. New York Fed’s Williams

8:30 a.m. Initial claims

8:30 a.m. Q4 GDP third reading

10:10 a.m. Fed Vice Chairman Richard Clarida

10:30 a.m. New York Fed’s Williams

1:00 p.m. Treasury auctions $62 billion 7-year notes

1:00 p.m. Chicago Fed’s Evans

7:00 p.m. San Francisco Fed’s Daly

Friday

8:30 a.m. Personal income/spending

8:30 a.m. Advance economic indicators

10:00 a.m. Consumer sentiment

Reference: CNBC