Why Did Bond Yields Surge Last Week?
Bond yields moved higher amid tax uncertainty
The US bond markets (BND) witnessed higher levels of volatility as the uncertainty surrounding tax reform hit markets last week. The US Senate unveiled its tax reform proposal, which differed from the House bill that was released last week. The Senate’s proposal to delay corporate tax cuts was the key difference between the versions. There were no other developments that moved the bond markets last week. Economic data was in line or better than expectations, signaling that the US economy is continuing to expand.
The Fed Watch Tool from the Chicago Mercantile Exchange (or CME) shows a 96.7% probability for a Fed rate hike at the December meeting.
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Bond market performance and speculator positions
For the week ending November 10, the ten-year yield (IEF) closed at 2.4, gaining seven basis points as compared to the previous week’s close. The two-year yield (SHY) closed at 1.7, up by four basis points, and the longer-term 30-year yield (TLT) closed at 2.9, up by seven basis points, in the previous week.
As per the latest Commitment of Traders (or COT) report released on November 10 by the Chicago Futures Trading Commission (or CFTC), speculator long positions rebounded last week. The total net bullish positions as of Tuesday, November 7, were 50,063 contracts as compared to 2,724 contracts a week before. A dovish FOMC statement after its November meeting could have prompted investors to go long on bonds. That scenario, however, is likely to change after the rise in tax cut uncertainty, and we could witness a drop in long positions next week.
The week ahead for the bond markets
Bond (AGG) markets are likely to react to the inflation data that is scheduled to be reported this week. Though the odds of a December rate hike aren’t likely to change, longer-term yields could react to a big surprise in October inflation. Apart from inflation, negative sentiment in the equity indexes is likely to increase demand for bonds.
In the next part of this series, we’ll look at the reasons behind the euro’s rebound last week.