Curve Watchers Anonymous is taking a hard look at the yield curve in light of the now odds-on market view of a March rate hike. [...] A flattening of the yield curve is not good for bank profits. Rising 10-year yields since mid-2016 are not good for mortgages or housing affordability.
Our Intake in the Bond Market
The end result is Fed Funds as in August is far far overbought and in dire need of a 20 basis point correction. Medians are far more overbought than averages. My opinion remains the same as August, don't raise because it will result in economic problems and a cut later. Raise more than one time then the Signal line goes to unsupportive upper boundaries.
While I don't understand the underlying upside drivers of the equity indices atop a 17% upmove since Nov 8, I have much more conviction about the bond market-- that it ended a 35-year bull market last July, and is in the budding stages of a new, generational bear market-- and a new bull market in YIELD (higher rates).
Charts Studies about Bonds and Yields
News and Analysis Related to the Bond Market and Interest Rates
Dow Jones Utilities Average - Daily Chart
Dow Jones Global Utilities Average - Daily Chart
Bonds as related to other asset classes
Bond prices and bond yields are many times the drivers behind price movements in currencies and other asset classes. In this section we aim to explain how those movements are being perceived and traded by our dedicated contributors and in-house analysts.
Utilities are big borrowers and their profits are enhanced by lower interest costs. Conversely, the utility average tends to decline when investors expect rising interest rates. Because of this interest-rate sensitivity, the Utilities Average is regarded by some as a leading indicator for the stock market as a whole.
Bond prices and bond yields trend in opposite directions. This is important for understanding most of the analysis and news published on this page. It's also important to know the underlying dynamic on why a bond's yield is rising or falling: it can be based on interest rate expectations or it can be based on market sentiment -uncertainty- and a "flight to safety" to bonds which are traditionally considered less risky.
The rate of change of interest rates, either the target rate or market rates, is important because this causes either stocks or bonds become more attractive. When this happens prices will tend to trend as money flows from one vehicle to the other until the new relationship is adequantely reflected in prices.
Bonds and stocks are always competing for investor money, and less so commodities. These usually trend in opposite direction of bond prices (falling commodity prices usually produce higher bond prices, vice versa); therefore, commodities would trend in the same direction as interest rates.
Educational material related to the bond markets
US Treasuries explained
If you are trading USD based or quoted pairs, watch the US bond market since a movement in Treasury yields impacts the US dollar. The driver of many movements in Treasury yields are partly driven by comments from Fed officials, so pay close attention to any news coming from US monetary authorities. US stocks usually get a boost from rising bond prices (falling Treasury yields), specially in inflationary times. But if they don't, then it's worth looking for market sentiment and reasons why the equity markets appear to be taking a more cautious stance. US stocks prices can also rise with falling Treasury prices (with rising yields) during a deflationary environment. In this case stocks and interest rates rise together which spurs global demand for the US Dollar.
UK Gilts explained
Global bond prices tend to move in synchrony. But there are moments when a country's bond market experiences a sharper movement than other bonds markets. Sometimes it may be a currency movement: The Gilt is the 10-year benchmark in the UK fixed income market. It's correlation to the Sterling is usually positive and a decoupling between both markets serves as an early alert that some intermarket relationship has changed. Changes in foreign exchange prices can overwhelm relative return calculations for international investors buying Gilts as an investment. When stripped out the currency component, UK Gilts should still provide some return to investors otherwise other bond markets, Treasuries for instance, may become attractive.
It is also true that a prolonged trend in energy prices is also a factor to consider as it will affect inflation expectations and thereby BOE's monetary policies.
Sentiment in the bond market
Here below you can find the two most recent arguments in favor of a bullish and a bearish development in the bond market. For a complete list please visit our Sentiment Aggregator.
Bullish for the Bond Markets
Ask how many times the implied probability calculators used by many failed over X amount of meetings. I see the Fed's desire to raise by placing Fed Funds above the Natural Rate but Fed Funds is not ready to rise and actually has a long way to go before a raise should be considered.