Near-term action from Fed seems unlikely
Bond markets (BND) rebounded sharply after disappointing data on June retail sales and inflation (TIP) and cautiously optimistic comments from Fed chair Yellen in her testimony to the US Congress. The Fed funds futures now suggest the next US Fed hike will come in 2018 as opposed to December this year. Inflation remained flat in June with the core inflation up only 0.1%. Retail sales dropped 0.2% in June with the ex-auto retail sales falling 0.2%. Gasoline station sales also fell 1.3% after a 3.0% fall in the previous month. Other economic data reported in the previous week remained below market expectations, leading to a drop in the probability of another rate hike from the US Fed this year to 43%.
Market reaction and speculator positions
US Treasuries (GOVT) were volatile during the week with the bond yields swinging from highs to lows and settling near the lower levels as rate hike fears subsided. The bond market experienced a minor recovery as bond yields turned negative. The two-year (SHY) yield closed at 1.4%, down by four basis points. The ten-year yield (IEF) moved lower to 2.3%, down by five basis points, and the longer-term 30-year yield (TLT) closed at 2.9 with a weekly loss of two basis points.
As per the latest Commitment of Traders report released on July 14 by the Chicago Futures Trading Commission (or CFTC), bond futures speculators have reduced their net bullish positions marginally in the previous week. The total net bullish positions stood at 257,027 contracts as compared to 262,962 contracts in the previous week.
Bond market this week
Supply in the bond markets is limited as compared to the heavy supply in the previous week. Bond markets will continue to react to the prospect of delayed quantitative tightening from the US Fed, and traders might also be impacted by the ECB monetary policy meeting. The ECB is expected to leave the policy unchanged, but discussions around the recent hawkish comments could lead to volatility in the bond markets.
In the next part of this series, we’ll analyze how the euro could react to the ECB policy meeting.