Will the Bond Market Recovery Continue this Week?

Bond yields drifted lower last week

US bond markets (BND) saw some recovery last week. Overheated expectations for a December rate hike cooled off after the FOMC meeting minutes were reported. A rate hike in December has most likely been priced in by the markets, and even a slight doubt about the rate hike could push bond yields lower. This was the case last week with the ten-year and 30-year yields falling by 10 basis points last week.

Economic data was in line with expectations. Inflation rose 0.5% in September, pushing the yearly rate of inflation to 2.2%. This change shouldn’t be mistaken for the Fed reaching its target, since most of the price rise was because of the bump in energy prices as hurricanes led to refinery closures.

Will the Bond Market Recovery Continue this Week?

Bond market performance and speculator positions

For the week ending October 13, the ten-year yield (IEF) closed at 2.27, losing 9 basis points, as compared to the previous week’s close. The two-year yield (SHY) closed at 1.49 (down by 1 basis point) and the longer-term, 30-year yield (TLT) closed at 2.806 (down by 9 basis points) last week.

As per the latest “Commitment of Traders” (or COT) report, released on October 13 by the Chicago Futures Trading Commission (or CFTC), speculators cut back on ten-year US government bonds for the third week in a row. The total net bullish positions as of Tuesday, October 10, were 192,606, compared to 232,156 contracts a week before.

Will bond markets continue the relief rally? 

Bonds (AGG) have limited economic data to respond to this week. Industrial production is the only major data, and it’s unlikely to have any major impact on the bond markets. There are, however, a number of Fed speakers scheduled to speak this week, including two speeches by Fed Chair Janet Yellen. If members remain hawkish, the rally in bond markets could stall—and if they turn dovish, expect another week of gains for US bonds.

In the next part of this series, we’ll discuss the reasons for the euro’s rebound last week.