As illustrated in the middle graph, recent dollar strength follows the difference in relative interest rates.
Our Intake in the Bond Market
USDJPY continues to hold support ahead of the 111.50 level for two days in a row and after multiple failed attempts to break that level, shorts are now in danger of a squeeze above the 112.50 level especially if US yields stage any sort of rally.
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.
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
Longer term, we hold our negative views on both German Bund and US Note future on the back of accelerating growth and inflation. US investors still have to adapt to the Fed's 2017 rate hike scenario (3 hikes) while European investors might face another "recalibration" of the ECB's APP-programme in H2 2017.
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.