Why Bond Markets Were Weak Last Week

Bond markets returned to weakness

The US bond markets (BND) failed to capitalize on their recovery during the week ending October 13. Positive economic data, higher chances for tax reform, and the possibility of a market-friendly Fed chair spelled trouble for the US bond markets last week.

The Fed’s Beige Book, which is a report on economic trends and challenges from all 12 federal districts in the US, painted a rosy picture of the US economy. The districts reported that the job market and the economy continue to remain robust. Bond traders’ doubts about the December rate hikes were alleviated last week with the CME Fed Watch Tool indicating a 91.7% probability of a Fed rate hike in the December meeting.

Why Bond Markets Were Weak Last Week

Bond market performance and speculator positions

For the week ending October 20, the ten-year yield (IEF) closed at 2.38, gaining nine basis points as compared to the previous week’s close. The two-year yield (SHY) closed at 1.57 (up by eight basis points), and the longer term 30-year yield (TLT) closed at 2.89 (up by nine basis points) in the previous week.

As per the latest Commitment of Traders (or COT) report, released on October 20 by the Chicago Futures Trading Commission (or CFTC), speculators cut back on the ten-year US government bond for the fourth week in a row. The total net bullish positions as of Tuesday, October 17, were 106,291 as compared to 192,606 contracts a week before.

Will bond markets manage to rebound?  

Bond (AGG) markets are likely to react to any news regarding tax reforms or Fed chair appointment. President Trump is expected to announce the next Fed chair by the first week of November, and the current contenders are current Fed governor Jerome Powell and former Fed governor Kevin Marsh. Both candidates align towards gradual rate hikes. This week, bond markets are likely to remain under pressure as these events unfold.

In the next part of this series, we’ll look at the reasons behind the euro decline in the previous week.