After a month of dovish talk and low volatility, U.S. Treasury bondholders may have fallen into a false sense of security, according to an editorial from Societe General. Weak Q2 results were no worse than expected, and have mostly been priced into the market already, but we are about to get three new reports that could upend all that complacency.

Treasury Yield

U.S. Treasury longs to get hurt this summer

The ISM (Institute for Supply Management) and NFP (non-farm payrolls) reports are due next week and the news probably won’t be positive. “Job creation this year has outpaced GDP growth,” says Vincent Chalgneau of Societe General. “The two measures will likely converge again, and whether they do so to the upside (GDP catching up) or the downside (weaker NFP) is absolutely crucial to the Fed’s reaction function. We expect the former, and the data should end up hurting Treasury longs this summer.”

There is a chance that the unusually high rate of job creation is simply making up for excessive firings during the recession, though it’s not clear why such a positive correction would have happened last quarter, giving credence to the idea that GDP and NFP are actually out of step.

U.S. Treasury: No reason to expect FOMC to echo Bernanke’s sentiments

Then there’s the FOMC (Federal Open Market Committee) statement coming down on July 31. Bernanke has gone to great lengths to reassure markets after he announced that tapering was on the horizon, but the FOMC is less optimistic. Chalgneau and his team don’t expect to see a significant change in the FOMC statement from their June 19 announcement, but that’s precisely what could hurt USTs.

“By sticking to its far more balanced tone, the FOMC may actually surprise the market to the hawkish side,” says Chalgneau. “In this context, we turn tactically neutral to bearish, and of course we remain strategically bearish over the rest of H2.” By the end of Q3 the Fed and the FOMC should be have enough evidence of stronger growth to justify tapering, but that data isn’t likely to show up in the next few days.

In addition to Vincent Chalgneau, the Societe General Fixed Income report was compiled by Ciaran O’Hagan, Mary-Beth Fisher, Wee-Khoon Chong, Adam Kurplel, and Jorge Garayo.