The Bond Market Seems Unconvinced About a Rate Hike

We had some important releases last week… but not too many surprises. The Fed released their minutes from the last meeting, giving the stock market hope since some policy makers called for more stimulus instead of a rate hike. That led to a strong rally in equities.

The long-term Treasury yields trended lower all week but still held near the 3% level. So, as certain as traders were earlier in the month of a rate hike, with yields trending lower, doubt has crept back into the market.

The tipping point may come when the November jobs report comes out next week. If there is no major financial market calamity in the meantime, the jobs numbers (especially wage growth) will likely make up the Fed’s mind on whether or not to hike.

I believe that even if the Fed does hike, we’ll soon find out that it won’t be the first of several but a “one and done.” So, if they hike, it will be by a small amount, and it won’t mean much to the markets.

The bond market seems to agree. Take a look at what has happened over the last month below… the yield curve is moving flatter.

A steepening yield curve means the bond market thinks the economy is heating up, with a likelihood of rising yields. A flattening yield curve means exactly the opposite.

As you can see above, short-term yields moved slightly higher over the last month in response to the Fed’s talk of raising the federal funds rate next month. The long end of the curve (30-year) barely budged.

This tells us that bond investors do not expect the economy to heat up in the future and that inflation is not a worry. This also tells us that traders expect any rate hike to be an isolated event and not the first of many.

Since the market reaction from the Paris terrorist attacks was non-existent and stocks actually rallied, I think it’s still likely the Fed will raise rates.

But again, my system doesn’t rely on what the Fed does or doesn’t do, but analyses moves in the long end of the yield curve.

Following the brief breakout about two weeks ago, Treasury bonds have settled back down. There should be opportunities ahead for data surprises, and I’ll be watching very closely if Dent Digest Trader triggers a trade alert. Stay tuned.