US bond markets troubled by rising yields
The US bond (BND) markets witnessed surprising selling last week despite the passage of the tax reform bill. The key reason for the fall in bond prices was uncertainty over a government spending bill to avert a government shutdown. Congress approved a temporary spending bill on Thursday and avoided a shutdown. A government shutdown usually has a negative impact on bonds, and thus investors were selling bonds throughout the week. This temporary arrangement could calm the nerves of bond market investors, resulting in some pullback in yields this week.
Bond market performance and speculator positions
For the week ended December 22, 2017, the ten-year yield (IEF) rose 13 bps (basis points) to 2.5%. The two-year yield (SHY) closed at 1.9, rising 5 bps, and the longer term 30-year yield (TLT) closed at 2.9, a rise of 13 bps. The sudden spike in yields stalled the yield curve that had flattened in the previous week.
According to the latest COT (Commitment of Traders) report released on December 22, 2017, by the CFTC (Chicago Futures Trading Commission), speculator long positions decreased sharply from 44,741 contracts to -44,230 contracts last week.
The week ahead for bond markets
Bond markets (AGG) could witness some retraction in yields once the markets open after the Christmas break. The underlying fundamentals haven’t changed in the last week to warrant a continued rally in bond yields. Economic data scheduled to be reported this week include pending home sales, consumer confidence, and trade balance. Three Federal Reserve members are scheduled to speak and could support the current optimistic view of the US economy. Some believe the economic data and Fed speakers won’t likely have any major impact on the performance of the bond market.
In the next part of this series, we’ll see why the European currency appreciated last week.