US bond markets: Yield curve flattening continues

The US bond (BND) markets returned to weakness last week after a minor bout of enthusiasm following the tax cut announcement. The troubles surrounding a flattening yield curve extended into the new year with the spread between the US ten-year and two-year Treasuries narrowing to a level last seen before the financial crisis of 2008. A flattening yield curve, if progress could lead to a yield curve inversion, could be a signal for a future recession. The reason for the yields falling lower was the lower level of inflation expectations.

Will Bond Yield Spreads Continue to Get Narrower?

Bond market performance and speculator positions

For the week ended January 5, 2018, the ten-year yield (IEF) increased by 7 basis points to 2.5%. The two-year yield (SHY) closed at 2.0, a rise of 8 bps (basis points), and the longer term 30-year yield (TLT) closed at 2.8, a rise of 7 bps. The retreat of yields from higher levels added to the concerns of a flattening yield curve.

According to the latest COT (Commitment of Traders) Report released on January 5, 2018, by the CFTC (Chicago Futures Trading Commission), speculators decreased their short positions on the ten-year bond with the net short positions decreasing to 75,850 contracts from 83,666 contracts. Speculative positions on the ten-year bond turned negative for the first time in six months in December 2017. If inflation doesn’t improve in 2018, we could expect a further softening of long-term yields going forward.

The week ahead for the bond markets

US inflation and FOMC (Federal Open Market Committee) member speeches could be the key drivers for the bond market (AGG) this week. US inflation for December 2017 is expected to be reported at a month-over-month growth of 0.2%, and annual inflation growth is expected to remain a little below 2%. If FOMC members remain optimistic, the impact on the markets could be limited, but if they have concerns about inflation, investors could expect fewer rate hikes in 2018, which could lead to some recovery in the bond markets.

In the next part of this series, we’ll analyze why the euro appreciated in the first week of 2018.

Latest articles

22 Jul

Economic Data and Earnings Before the Fed's Meeting

WRITTEN BY Mohit Oberoi, CFA

Economic data and earnings will keep investors busy this week. More than a quarter of the S&P 500 companies are scheduled to release their earnings.

22 Jul

Why UPS's Q2 Earnings Could Fall Year-over-Year

WRITTEN BY Anirudha Bhagat

UPS is scheduled to report its second-quarter earnings results on July 24. Estimates suggest that things aren't looking good for it this quarter.

Boeing (BA) plans to report its second-quarter 2019 results on July 24.

Hershey (HSY) is set to report its second-quarter results on Thursday. We expect Hershey’s sales and earnings to grow year-over-year, but that growth to be low.

22 Jul

Align Technology: What to Expect in Q2

WRITTEN BY Margaret Patrick

Align Technology (ALGN) plans to release its second-quarter earnings on July 24 after the market closes.

On July 19, Tilray was trading at a forward EV-to-sales multiple of 12.1x. The company was still trading at a premium to the peer median at 6.0x.