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Could the Fed Derail the Bond Rally?

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Bond markets continue to rally

The US bond market (BND) continued its impressive rally last week. The possibility of a slower pace of rate hikes from the US Fed boosted bond market sentiment. Bond yields across the curve fell. The ten-year yield (IEF) closed at 2.2%, with a fall of 95 basis points. The two-year yield (SHY) closed at 1.3%, and the longer-term 30-year yield (TLT) closed at 2.8%. Converging monetary policy between the United States and other developed economies is reducing spreads between the nations’ government bonds (GOVT). In simpler terms, the US Fed is expected to pause its monetary tightening until December while it tries to normalize its balance sheet, and the European Central Bank is expected to announce monetary tightening in the near future.

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Bond market speculators turn bullish

According to the CFTC’s (US Commodity Futures Trading Commission) latest Commitments of Traders report, bond speculators increased their bullish positions last week. Net bullish positions stood at 282,329 contracts, compared with 257,027 the week prior. This increase in long positions was the first in five weeks. A favorable monetary climate in recent weeks has increased bond market bulls’ appetite, and this trend is expected to persist if there is no negative surprise following the Fed’s meeting this week.

Week ahead for bond markets

There are a few important events lined up for bond markets this week. US economic data, which includes existing home sales, new home sales, consumer confidence, and core durable goods orders, is due. Another round of weak data could drive bond prices higher. The Fed is meeting on July 25, and will release a statement the following day. There is no press conference scheduled for after the meeting, and past meetings without a press conference have not usually resulted in a rate change. Bond traders will be looking for any change in tone or clues about balance sheet trimming. It’s not likely the Fed will derail the bond market’s rebound this month.

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