Bond market yields remained unchanged despite reduced geopolitical frictions
The US bond markets (BND) turned volatile (VXX) in the week ending August 18 but remained close to their August 11 close. Upbeat economic data from the US lifted sentiments, but the troubles of lower inflation failed to alter the view that rates won’t be raised anytime soon. Noise from Washington after the Charlottesville clashes and the subsequent resignation of key business leaders from Trump’s business councils doused hopes of fiscal or tax reforms from the US administration.
Bond market performance and speculator positions
Last week, the ten-year yield (IEF) closed at 2.19, a 7-basis-point-higher close as compared to the August 11 close of 2.12. The two-year yield (SHY) closed at 1.3 and the longer-term 30-year yield (TLT) closed at 2.8 in the previous week ending August 18. As per the latest Commitment of Traders (or COT) report released on August 18 by the Chicago Futures Trading Commission (or CFTC), bond futures speculators have reduced their long positions after two weeks of declines. The total net bullish positions stood at 200,592 contracts as compared to 229,836 contracts in the previous week.
Week ahead for the bond markets
All eyes will be on the Jackson Hole Symposium if there is no major risk-off trade in the first three days of this week. Comments from US and European Central banks will be in focus. They are likely to acknowledge the improvement in the global economy and plans to normalize monetary policy. European Central Bank chair, Mario Draghi, will also be at the event, and his plans for the ECB’s stimulus program will have an impact on the US (GOVT) and European bond markets.
Markets expect no further rate hikes this year with the probability of a December rate hike at 37%. This view is likely to be cemented during the symposium. Balance sheet reduction plans could be discussed again and markets are expecting this announcement at the September meeting. Except for risk-off trade, there likely won’t be any major surprises for bond markets this week.