8 Aug

Inflation Data’s Impact on the Bond Markets


Bond markets remain undecided

The US bond markets (BND) puzzled investors with their behavior in the week ended August 4, 2017. The Federal Reserve speakers continued to flag concerns about the slowing inflation growth. However, lower unemployment boosts the positive outlook for the US economy.

Stable inflation (TIP) and lower unemployment are the key goals for the Fed, but recent economic growth has been accompanied by lower inflation and lower unemployment. This puts the Fed in a difficult spot as its members try to prepare the markets for further rate hikes while inflation remains stubbornly low.

As far as the markets are concerned, they are not convinced that inflation could increase dramatically, resulting in falling yields in the last few weeks. This disagreement seems to be a key factor driving the bond markets.

Inflation Data’s Impact on the Bond Markets

Bond market performance and speculator positions

For the week ended August 4, the ten-year yield (IEF) closed at 2.264 compared to the July 28 close of 2.291. The two-year yield (SHY) closed at 1.355 and the longer-term 30-year yield (TLT) closed at 2.842 in the previous week ended August 4.

According to the latest Commitment of Traders (or COT) report, released on August 4 by the Chicago Futures Trading Commission (or CFTC), bond futures speculators have cut their long positions for a second week in a row. The total net bullish positions stood at 210,880 contracts compared to 280,684 contracts in the previous week.

Week ahead for the bond markets

Fed member speeches and the US inflation data on Friday, August 11, should be in focus this week. FOMC members Neel Kashkari, William Dudley, and Robert Kaplan are scheduled to speak this week. Their views on the US interest rate path, balance sheet reduction, and economic outlook are likely to have an impact on the bond markets (GOVT).

Core inflation is expected to have increased by 1.7% in July. If the data is reported below expectations, we can expect a further slide in bond yields as investors could disregard further rate hikes until December.

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