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How Rising Geopolitical Tensions Could Affect Bond Yields

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Bond market yields drop lower amid geopolitical risks

US bond markets (BND) rallied in the previous week as tensions between the US and North Korea escalated. US Treasuries (GOVT) are considered a store of value in times of uncertainty. Investors rush to the safety of bonds when volatility (VXX) increases in the markets. When demand for bonds increases, the required rate for bonds (or the yield) reduces. The demand for longer-term bonds increases more than for short-term bonds when markets move into a risk-off environment.

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Bond market performance and speculator positions

For the week ending August 11, the ten-year yield (IEF) closed at 2.1, seven basis points lower than the August 4 close of 2.3. The two-year yield (SHY) closed at 1.3, and the longer-term 30-year yield (TLT) closed at 2.8 in the week ending August 11. According to the latest Commitment of Traders (or COT) report, released on August 11 by the Chicago Futures Trading Commission (or CFTC), bond futures speculators have increased their long positions after two weeks of declines. The total net bullish positions stood at 229,836 contracts as compared to 210,880 contracts in the previous week.

Week ahead for the bond markets

Geopolitical tensions aside, US FOMC meeting minutes and US retail sales will be the key economic data released this week. Investors will be closely watching the developments involving North Korea. If the tensions escalate, we can expect a further drop in bond yields. Markets, however, aren’t expecting a full-blown war at this point. Thus, yields could recover from their drop last week.

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