Bond Traders Await Comments Following FOMC Meeting
Today’s Spotlight Market
Traders of U.S. government securities will focus not only on how each individual maturity is trading but also on the relationship between the maturities, or the so-called yield curve.? Here we see the yield curve continue to flatten with the 5yr/30yr yield differential currently at 155 basis points vs. 225 basis points 1-year ago. Analysts attribute this flattening of the curve to expectations that the Fed will be raising interest rates in the coming months, which is putting pressure on shorter-term yields that are more sensitive to interest rate actions by the Federal Reserve. However, longer?term rates are finding support from expectations that global economic growth will continue to struggle and in turn, see foreign Central Banks continue loose monetary policies for potentially longer periods of time than the Fed, which will make U.S. Bonds at the long end of the curve more attractive for foreign buyers due to higher yields.
Fundamentals
30-year Treasury bond yields have fallen to their lowest levels since June of last year as recent weakness in the U.S. equity markets, combined with lackluster economic data, have sent traders into the long-end of the yield curve. Long bonds got an additional boost on Monday as U.S. pending home sales fell by 1.1% in June vs. expectations for a 0.5% gain. This was the first decline in 3 months and raises questions on how strong the housing recovery actually is, especially with interest rates at historically low levels. Analysts note that foreign buyers still find U.S. Treasuries attractive as a safe haven asset, despite current low yields, as alternatives such as German and Japanese government bonds are yielding even less than U.S. government debt.
Traders will be carefully parsing the Fed statement following the 2-day FOMC meeting that is ending this morning for any changes in opinion from Fed voting members on when the Fed may need to begin shifting to a tighter monetary policy. Currently, traders are expecting the first rate hike to occur in the middle part of 2015, which if true, would be the first interest rate hike in 6 ? years. However, Fed Chairwomen Janet Yellen is on record stating that the Fed may need to keep interest rates at low levels for a considerable period to make certain that the U.S. economy is on solid footing. Given the inconsistencies we have seen in economic data, the Fed may remain in a very accommodating monetary stance for longer than analysts and traders currently expect.? ?
Technical Notes? -? View Today’s Chart
Looking at the weekly continuation chart for U.S. Treasury Bond futures, we notice prices now trading above the 200-week moving average, which is a bullish long-term indicator. The 14-week RSI is positive with a current reading of 60.10. Bullish traders will need to see front-month bonds close above resistance at 139-03 to set-up a test of the June highs just below 141-00. Bearish traders would need to see a close below chart support at 134-11, to signal that a near-term top may be in place.
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