How Might Bond Markets React to North Korean Nuke Test?
Bond markets and the confused reaction
The US bond markets (BND) defied the fundamentals to remain weak for the week ended September 1, 2017. Bond yields rallied in the aftermath of the weak August jobs report, a surprise to many since the opposite reaction is usually expected when the jobs report disappoints. Investors could be expecting a hawkish tone from the Fed going into the September meeting, which could be the only reason for a rise in bond yields last week.
The latest apparent hydrogen bomb test by North Korea is likely to add some more upward pressure to bond yields since rising geopolitical tensions could act as a limiting factor for the Fed to tighten its policy further.
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Bond market performance and speculator positions
For the week ended September 1, 2017, the ten-year yield (IEF) closed at 2.2, with most of the gains recorded after the non-farm payrolls report. The two-year yield (SHY) closed at 1.4, and the longer term 30-year yield (TLT) closed at 2.8 in the week ended September 1.
According to the latest Commitment of Traders Report released on September 1, 2017, by the CFTC (Chicago Futures Trading Commission), speculators remained bullish on the ten-year US government bond. The total net bullish positions as of Tuesday, August 29, 2017, were 283,719 compared to the previous week’s tally of 261,245. The data were up to Tuesday, and the surprise turn of the bond markets on Friday could have changed the positioning in favor of the bears for this week.
Week ahead for the bond markets
Tremors from the apparent North Korean nuclear test could be seen in the financial markets. Possible risk aversion is likely to limit the ascent of bond yields (AGG) this week. The markets might also focus on Fed speakers, especially William Dudley, president of the Federal Reserve Bank of New York, who has recently voiced support for another rate hike this year. The hawkish tone from FOMC (Federal Open Market Committee) members could have a positive impact on bond yields, but fears of military escalation in Asia could limit the gains in bond yields.
Other economic data of importance for the bond markets would be the Fed’s Beige Book scheduled to be released on Wednesday, September 6, 2017. In the next part of this series, we’ll look at the possible implications for the global markets after the European Central Bank’s decision on September 7.