Risk On, Risk Off: The US Bond Market Reacts to Overseas Events



The basis for numerous long-term interest rates

Ten-year bond yields influence everything from mortgage rates to corporate debt. They’re now the benchmark for long-term US interest rates. Some of you might remember when the 30-year bond was the benchmark, but that changed in the 1990s. When investors want to know what’s going on in the bond market, in essence they want to know where the ten-year bond is trading.

Note that short-term rates are still important, particularly LIBOR (IntercontinentalExchange London Interbank Offered Rate), which is the base rate for almost all short-term rates.

Rate information is relevant to REITs such as American Capital Agency (AGNC), Annaly Capital Management (NLY), Redwood Trust (RWT), and MFA Financial (MFA). Investors can trade the REIT sector via the iShares Mortgage Real Estate Capped ETF (REM).

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Bond yields react to overseas events

After closing out the prior week at 2.38%, the bond market, as tracked by the iShares 20+ Year Treasury Bond ETF (TLT), rose first early in the week as the huge sell-off in China supported the “risk-off.” trade. Later that week, optimism about a deal in Greece and a two-day rally in China ended up pushing bonds right about to where they started the week at 2.40%.

The week after the jobs report is invariably data-light, and bonds didn’t have a lot domestically to focus on. The FOMC minutes were a non-event.

The consensus seems to be that the first hike will be in September

While the Fed could have moved in June, most participants thought this timing unlikely. The consensus now seems to be that the Fed will move in September, with the caveat that any such move will depend on data. The Fed wants to get off the zero bound—if only to reduce some of the distortions that come from rates this low and to give itself some ammunition if the economy falls into another recession.


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