Bond markets remain under pressure
US ten-year bond market yields have scaled a new seven-year peak at 3.07, their highest level since July 2011. This 100-basis-point move, which happened over the span of a little over eight months, has taken its toll on bond prices. Thanks to rising crude prices, increased chances of higher inflation have been fueling the recent rally in rates.
A hawkish Federal Reserve, which has been committed to raising interest rates, has also added to the upward pressure on bond yields. The Vanguard Total Bond Market ETF (BND), which tracks the performance of the bond markets, was down 0.49% in the week that ended on May 18, closing at 78.54.
Bond market performance and speculator positions
In the week that ended on May 18, the ten-year (IEF) bond yield ended up at 3.1%, a rise of nine basis points. The two-year yield (SHY) closed at 2.5%, a rise of one basis point, and the longer-term 30-year yield (TLT) closed at 3.2%, a fall of ten basis points.
As per the latest Commitments of Traders report released by the Chicago Futures Trading Commission on May 18, speculator short positions decreased last week. Total net bearish positions decreased by 26,707 contracts from 408,629 contracts to 381,922 contracts as of May 15. It’s possible speculators were locking in gains as the ten-year yield crossed 3%, which could now be a long-term support for bond yields going forward.
The week ahead for the bond markets
This week, the Federal Open Market Committee’s meeting minutes will likely be the key focus. The markets (BSV) will be looking for confirmation of continued rate hikes from the Fed, which, if found, could lead to further gains in bond yields this week.
There’s a lot of supply from the US Treasury, including the auctions of $33 billion worth of two-year notes, $36 billion worth of five-year notes, and $30 billion worth of seven-year notes. A combination of low bond prices, higher yields, and a strong US dollar could lead to solid demand for these new issues. Overall, the trend of higher yields could remain intact this week.