Why Are Bond Yields Moving Lower Again?
Bond yields back at November levels
The US bond markets (BND) remained volatile last week as investors reacted to changes in the Federal Reserve and the impact that Hurricanes Harvey and Irma would have on the Fed’s interest rate policy. The Fed’s vice chair Stanley Fisher, who is considered one of the key architects of the US monetary policy, announced his resignation, leaving doubts about the Fed’s policy succession. President Trump’s surprise deal with the Democrats to extend the US debt ceiling calmed the nerves of bond traders, leading to lower bond yields last week.
The markets are now pricing in the lower probability of a Fed rate hike before 2018 since the Fed is expected to hold off on monetary tightening until the hurricane-battered regions get back to normal. On the other side of the Atlantic, the European Central Bank refrained from announcing any tightening, but investors continue to bet on a tightening announcement in the October meeting.
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Bond market performance and speculator positions
For the week ended September 8, 2017, the ten-year yield (IEF) closed at 2.08, falling by 8 bps (basis points) compared to the previous week’s close. The two-year yield (SHY) closed at 1.27, and the longer term 30-year yield (TLT) closed at 2.67 that week.
According to the latest COT (Commitment of Traders) report released on September 8, 2017, by the CFTC (Chicago Futures Trading Commission), speculators cut back on the ten-year US government bond. The total net bullish positions as of Tuesday, September 5, 2017, were 221,806 compared to the previous week’s tally of 283,719.
More pain ahead for bond yields?
With the odds of further rate hikes in 2018 remaining low, bond market (AGG) traders could remain bearish on bond yields. The FOMC (Federal Open Market Committee) meeting on August 19–20, 2017, is turning out to be a non-event, but investors will most likely be closely observing the tone of the statement.
Uncertainty at the Fed since the terms of vice chair Stanley Fisher and chair Janet Yellen are ending will keep volatility levels elevated. This week, US retail sales and inflation data are key indicators, but the impact could likely be muted since investors don’t expect the Fed to change its policy in 2017.