Is There More Trouble Ahead for Bond Markets?

Bond yields continued to move higher

There seems to be no respite in sight for the US and global bond markets. The fall in bond markets (BND) started in November 2016, continued into January 2017, and then took a breather as the markets began to question if the Trump administration can deliver on its campaign promises and if the Fed will continue its tightening program. Slowing bond prices began to come back, but in September 2017, the announcement of possible tax cuts and the Fed’s stance to continue tightening reignited troubles for bonds. In the last year, the ten-year U.S. Treasury yield has risen from 1.59% in September 2016 to 2.33% in September 2017. That period includes three rate hikes by the Fed totaling 75 bps (basis points).

Is There More Trouble Ahead for Bond Markets?

Bond market performance and speculator positions

For the week ended October 6, 2017, ten-year yield bonds (IEF) closed at 2.36, rising 3 bps compared to the previous week’s close. The two-year yield bonds (SHY) closed at 1.50, a rise of 1 bps, and the longer term 30-year yield bonds (TLT) closed at 2.896, a rise of 1 bps in the previous week.

According to the latest Commitment of Traders report released on October 6, 2017, by the CFTC (Chicago Futures Trading Commission), speculators cut back on the ten-year US government bond for the second week in a row. The total net bullish positions as of Tuesday, October 3, 2017, were 232,156 compared to 256,626 contracts the previous week.

Will bond markets have a respite this week?

Bond (AGG) traders have few reasons to be happy this week. Chances for tax reforms continue to increase, with the US Senate moving on a path that would mean only 51 votes could be required to pass the bill.

The most important event for the economic calendar is the September CPI (Consumer Price Index) and retail sales data to be reported on Friday, October 13, 2017. The consensus estimate is for inflation to rise 1.8% compared to 1.7% in August. The September FOMC (Federal Open Market Committee) meeting minutes and speeches from key FOMC members this week should also have an impact on the bond market.

In the next part of this series, we’ll take a look at the reasons behind the decline of the euro in recent weeks.