What to Make of the Pullback in Bond Yields Last Week



US bond markets yields cooled off last week

The US bond (BND) markets regained some of the previous week’s losses. Bond yields across the board fell following the stop-gap funding arrangement before the end of 2017. In 2017, the bond markets have witnessed three rate hikes, but the impact on bond yields has been minimal.

The ten-year government bond yield was 2.46 at the beginning of 2017 and closed at 2.40 at the end of 2017. The 30-year government bond yield dropped from 3.07 to 2.73 in 2017 despite a rate increase of 0.75% over the same period.

The reason for the yields staying lower was the lower level of inflation expectations. This difference in expectations can be expected in 2018 as well unless inflation picks up.

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Bond market performance and speculator positions

For the week ended December 29, the ten-year yield (IEF) decreased by 8 basis points to 2.40%. The two-year yield (SHY) closed at 1.88% (down by 1 basis point). The 30-year yield (TLT) closed at 2.73 (down by 11 basis points) in the previous week. The retreat of yields from higher levels added to the concerns of a flattening yield curve in the previous week.

According to the latest Commitment of Traders report, which was released on December 29 by the Chicago Futures Trading Commission, speculators increased their short positions on the ten-year bond.

The net short positions increased from 44,230 contracts to 83,666 contracts. The net positions turned negative for the first time in December since April 2017, a sign that investors are expecting yields to climb in the year ahead.

The week ahead for the bond markets

The US FOMC December meeting minutes and the December employment data are key economic data releases that could impact markets this week. Investors could understand why there were two dissents against the rate hike at the previous meeting and whether others were on the border to oppose a rate hike at the next meeting. There might not be an immediate impact on the bond (AGG) markets, as the next hike is expected in March 2018.

In the next part of this series, we’ll analyze why the euro appreciated through 2017.


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