Why Bond Markets Can’t Rally Aggressively This Week

US bond markets (BND) remained volatile (VXX) in the week ending August 25. Investors reacted to US political developments and Fed Chair Janet Yellen’s speech at the Jackson Hole symposium. A lack of any clear direction from Yellen about future interest rates and balance sheet unwinding program left investors pricing in lower possibilities of an immediate rate hike from the Fed.

For the week ending August 25, the ten-year yield (IEF) closed at 2.16 and fell by three basis points—compared to the close on August 18. The two-year yield (SHY) closed at 1.34, while the 30-year yield (TLT) closed at 2.75 in the previous week ending August 25.

According to the latest “Commitment of Traders” report released on August 25 by the Commodity Futures Trading Commission, speculators have turned bullish on the ten-year US government bond. The total net bullish positions stood at 261,245 contracts—compared to 200,592 contracts in the previous week.

The seeds for more debt ceiling drama were sown last week. President Trump threatened a government shutdown if the funding for the border wall isn’t approved. The Senate returns from the summer break on September 5 and must approve the debt ceiling limit increase—at least by October 15.

The drama will have a huge impact on US government (GOVT) Treasuries. Rating agencies could downgrade their credit rating, which could dramatically increase the required rate (or yields) on these bonds and lead to a fall in bond prices. The concern could limit any sharp rallies in bond markets in the coming weeks.