Why Bond Market Uncertainty Could Be Here to Stay

FOMC members remain divided

The September FOMC (Federal Open Market Committee) meeting minutes have indicated that members continue to remain divided with respect to an interest rate hike in December. Citing lower levels of inflation (TIP), FOMC doves want no more interest rate hikes until inflation rises to the required target of 2%, and this disagreement between hawks and doves could lead to more uncertainty over the next couple of months.

Meanwhile, investors in the bond market (BND) remain anxious that there has been no clear signal from the Fed. Rising yields, in anticipation of faster rate hikes, have seen bond prices (SHY) trend lower, but with any brakes applied to future hikes, there could be some effect on bond prices.

Why Bond Market Uncertainty Could Be Here to Stay

Bond market performance

Bond yields (AGG) have rallied since mid-September in anticipation of a hawkish statement from the FOMC. This was the case after the September statement, when we saw the odds of a rate hike in December increase.

The minutes of the meeting, however, have cast some doubt on previous hopes, given the dovish tone that some members have taken if the data in coming months remains subdued.

Key takeaway from the September meeting minutes

The minutes of the September meeting left some doubt on the minds of investors. Although the Fed’s fund (BND) futures are still pricing in a probability higher than 80% for a rate hike in December, the rate hike decision itself will be dependent on incoming economic data. There are two more unemployment and inflation (VTIP) reports scheduled to be reported before the December meeting, and any surprise—positive or negative—is likely to increase volatility in markets.