Bonds within the Intermaket Picture
Bond prices and bond yields are many times the drivers behind price movements in currencies and other asset clases. In this section we aim to explain how those movements are being perceived and traded by our dedicated contributors and in-house analysts.
Bond charts we are looking at
Dow Jones Utilities Average - Daily
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.
Latest News and Analysis
Relevant Articles about Bonds
An increase in expectations for economic growth, inflation and central bank tightening would appear to signal a bear market in bonds. Given these factors, how can the bond market avoid the bigger bear?
In this segment, Nicole Elliott, Private Investor and Technical Analyst detail the divergence between the Fed funds rate (currently at 0.5%), Treasury bills and interbank lending. Elliott says the yields on the Treasury bills are far lower than the Fed funds rate, while the interbank lending rates are at least 50 bps above the Fed funds rate. She calls this as the failure of the Fed policy. Elliott then goes on to detail the dynamics of overnight offshore Yuan lending rates.
The recent pronounced upward movements in U.S. Treasury yields at the long end of the yield curve signal that the fundamental drivers affecting Treasury yields have shifted for the first time since 2013.
The point [of the illustrattion on the right] is simply to confirm what we know, and that is that recently UK rates have risen while sterling has fallen. We think this is meaningful.
The ECB remains in a middle ground between hints of tapering and wording that tries to avoid that impression. There is uncertainty on the ECB strategy beyond 2017.
While everyone has their eye on the Federal Reserve, it’s really the inching up of LIBOR that should be scaring market observers.
China is the second-largest holder of Treasuries after Japan but at the moment someone is clearly selling. Perhaps it's one of the Asian powers? We won't find out for months but Treasury-holdings data in the months ahead is must-watch economic news.
Bonds as related to other asset classes
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.
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.
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 is still more reason for bond yields to be rising rather than falling. [...] Market-based measures of inflation expectations have been rising globally, consistent with stronger global growth indicators and stronger commodity prices in recent months. These factors are likely to reassert upward pressure on global bond yields, and rising relative real interest rates in the USA, where rate hikes are more likely to be implemented, supporting the USD.
Bullish for the Bond Markets
If inflation remains at a more moderate pace than some are currently projecting–perhaps reflecting continued seller competition, dollar appreciation, and/or more modest energy price increases–then the FOMC will not need to be as aggressive in raising the funds rate. Moreover, estimates of the neutral fed funds rate indicate that the rate remains below its historical average of prior cycles. The recent policy proposals aimed at increasing the repatriation of capital held abroad, which would boost the cash position of domestic firms as a source of funds and thus reduce business loan demand, may also support the case for lower interest rates going forward than otherwise might be the case.
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