According to Bloomberg, positioning by specs in the long bond is the highest it has been in 10-years [...] But, there are other rationales that suggest betting against his one-way bet may be worth the risk.
Charts Studies about Bonds and Yields
The other key development to watch on this front is the treasury yield curve. The 2yr-10yr yield curve, which measures the difference in yield between the 2-year US treasury bond and the 10-year US treasury bond, has been in freefall so far this year and is currently testing its lowest level in nearly a decade at just 78bps. While it's still a ways from "inverting" (when the 2-year treasury actually yields more than the 10-year bond, a development that has historically signaled an imminent recession), the flattening structure could still prompt the Fed to hold fire on further interest rate increases this year.
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.
Bearish for the Bond Markets
There are lots of good rationales for being long bonds: the US economy is slowing as seen in the 2s vs 10s yield spread tightening; inflation expectations are tumbling; and the Fed cannot afford to be aggressive with the US and global economy still sluggish and at the same time reduce the size of their balance sheet. But, there are other rationales that suggest betting against his one-way bet may be worth the risk...
Bullish for the Bond Markets
Traders can front run the unwind of the balance sheet when it starts. The difficulty is determining whether increased supply of bonds raises or lowers prices. You’d think it would lower prices based on the rule of supply and demand, but the market is more dynamic than that. In the long-term I am very certain that the balance sheet will go up. Any short-term decline is a pitstop. Maybe that thought process is why bonds don’t selloff on the news of an unwind.