Will Bond Market Investors Benefit from Risk-Off Trade?


Jun. 11 2018, Updated 1:27 p.m. ET

Bond markets benefit from the global rise in risk

The US bond market seems to be benefiting from multiple crises around the world. Bond yields dropped dramatically in the middle of the previous week and left traders searching for the reason for this sudden decline. First, there was the crisis in emerging markets, which could further escalate if the US dollar continues to appreciate, and then there are uncertainties about Italian debt, the G7 meeting, and the upcoming central bank meetings this week. These uncertainties led investors into risk-off mode, which pushed bond yields lower and could keep yields under pressure in the near future. The Vanguard Total Bond Market (BND) ETF, which tracks the performance of the bond markets, was down by 0.28% for the week ending June 8 and closed at 78.9.

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Bond market performance and speculator positions

For the week ending June 8, the ten-year (IEF) yield closed at 2.9%, appreciating by four basis points after moving close to 3.0% during the week. The two-year yield (SHY) closed at 2.5%, up by three basis points, and the longer-term 30-year yield (TLT) closed at 3.1%, up by five basis points.

As per the latest commitment of traders (or COT) report, released on June 8 by the Chicago Futures Trading Commission, speculator short positions on the ten-year Treasury futures decreased last week. The total net bearish positions as of Tuesday, June 8, decreased by 73,521 contracts from 471,067 contracts to 397,546 contracts.

The week ahead for the bond markets               

The almost sure thing for bond markets (BSV) this week is the increase in volatility. There is a lot at hand that could impact bond markets this week with risk aversion being the key driver. The continued turmoil in emerging markets, a disgruntled US at the G7 meeting, the outcome of the Trump-Kim summit, and the all-important central bank meetings could affect markets. The US could lead the way in raising rates, which could push the bond yields and the US dollar higher. We’ll discuss more on central bank actions in the next article in this series.


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