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Bond Market Pain Could Continue This Week

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Apr. 16 2018, Updated 8:35 a.m. ET

Bond market yields rise

US bond markets’ relief after a dovish FOMC statement was short lived as geopolitical tensions took center stage. US bond yields rose along the curve dominated by a sharp increase in yields at the short-end of the curve, which reignited fears of the yield curve flattening. The 2s10s spread has now reduced to 45 basis points and the 2s30s spread has been reduced to a fresh cycle low of 66 basis points. The hope that the current geopolitical risk wouldn’t increase led to the appreciation of bond yields and a decline in bond prices in the previous week. The Vanguard Total Bond Market ETF (BND) tracks bond markets’ performance. BND ended the previous week at 79.63 and depreciated 0.11% for the week ending April 13.

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Bond market’s performance and speculator positions

For the week ending April 13, the 10-year (IEF) yield closed at 2.8% and appreciated by 5 basis points. The two-year yield (SHY) closed at 2.4% (up by 9 basis points) and the longer term 30-year yield (TLT) closed at 3.0% (up by 1 basis point). The lower increase in long-term yields compared to short-term yields increased the issue of the yield curve flattening. An inverted yield curve is a sign of a future recession, but we aren’t there yet.

According to the latest Commitment of Traders report released on April 13 by the Commodity Futures Trading Commission, speculators’ short positions decreased last week. The total net bearish positions as of April 10 decreased by 44,730 contracts from 375,365 contracts to 330,635 contracts.

The week ahead

The decrease in the short positions was before the market sell-off last week. The hope of limited consequences from the US-led missile attack on Syria could limit any major increase in the demand for bonds (BSV) this week. However, the focus will be on the overall risk sentiment in the markets. The US two-year yield surged to a ten-year high. Investors remain hopeful that the attack on Syria is a one-off incident and that tensions won’t escalate. If there aren’t any more negative surprises this week, the US bond market could continue to struggle.

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