Why January Fed Meeting Could Impact Bond Markets
US bond markets reel under pressure
The US bond (BND) market remained largely unchanged in the week ended January 26, 2018, which was filled with surprises. The reopening of the US government on Tuesday, hawkish comments from the central banks of Europe and Japan, and President Trump’s “America is open for business” speech at the World Economic Conference in Davos, Switzerland, had little impact on the bond market. Economic data were a little weaker than expected with 4Q17 GDP coming in below expectations at 2.6%.
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Bond market performance and speculator positions
For the week ended January 26, the ten-year yield (IEF) remained unchanged at its three-year peak of 2.7%. The two-year yield (SHY) closed at 2.1%, an increase of 5 bps (basis points), and the longer-term 30-year yield (TLT) closed at 2.9%, a decrease of 2 bps.
According to the latest COT (Commitment of Traders) report released on January 26 by the CFTC (Chicago Futures Trading Commission), speculators increased their short positions on the ten-year bond with net short positions increasing from 89,259 contracts to 117,877 contracts. With traders remaining content with last week’s events, it’s possible that the US dollar could drive bond investors this week. If the US dollar falls further, it could impact the yields of foreign investors, who could move their investments out of the United States. That could put further pressure on the US bond markets (AGG).
The week ahead for bond markets
This week, the focus could be on the FOMC meeting, Janet Yellen’s last meeting as Fed chair. There won’t be any press conference after the meeting, and the markets don’t expect any change in tone or interest rates this time. The core PCE (personal consumption expenditures) inflation data could be import since the Fed prefers this measure of inflation when making interest rate decisions. The market consensus is for a year-over-year growth of 1.6%. Any surprises here could increase the volatility in the bond markets.
In the next part of this series, we’ll analyze how the European Central Bank failed to contain the strength of the euro in the previous week.