The Tale of Two Bond Markets
Today’s Spotlight Market
With both the European Central Bank (ECB) and the Reserve Bank of New Zealand (RBNZ) lowering their benchmark interest rates this week, one has to wonder how this will influence members of the Federal Reserve who may be looking at rate hikes in 2016. Fed Funds futures traders are not looking for any movement on interest rates at the March Federal Open Market Committee meeting scheduled for next week, with the March futures currently pricing in a 0% chance of a rate hike. In fact, it is not until the July FOMC meeting where the futures market is pricing in a near 50% probability of a rate hike.
Fundamentals
U.S. Treasury yields are starting to see some volatility the past few weeks as traders attempt to assess how signs of slowing global economic will influence the Federal Reserve and an American economy that appears to be avoiding recessionary fears unlike we are seeing in parts of Asia and Europe. Data from Japan showing that its economy contracted by 1.1% in the fourth quarter of 2015 sent its 10-year yields to a record low of negative 0.1%, and sparked renewed interest in U.S. Treasuries where even 10-year yields below 2% look attractive to investors in a world where negative interest are becoming all too common. Bond traders are also facing a conundrum between what the U.S. Treasury market and the high yield corporate bond market are saying about expectations for the economy going forward, as each market segment appears to be painting a different picture.? On the Treasuries side we are seeing the yield curve continue to flatten, with the 10-yr/2-yr curve currently at 0.98% which is down 0.52% from a year earlier. A flattening of the curve is generally considered a sign that market participants are expecting slower economic growth prospects. If that were true, one would think that yields on lower quality corporate debt would increase given the increased risks of a slowing economy on corporate profits. However, we are seeing the opposite occur as high-yield corporate bond indices are in a bullish trend of late and even the debt of companies involved in the energy sector are seeing the bond prices rise and yields decline as it appears that investors and traders are starting to believe that the worst may be over for the energy sector with Oil prices now holding above their lows for the year. So the million dollar question is which Bond sector will ultimately be proven correct and traders will be even more focused on the actions and statements coming out of the Federal Reserve and other major global Central Banks in the coming weeks and months to gauge the levels of concern on the performance of the global economy, and the prospects of further rate hikes by the Fed for the remainder of the year.
Technical Notes? -? View Today’s Chart
Looking at the weekly continuation chart for 10-yr Note futures, we notice prices attempted an upside ?breakout? from the nearly 3 year old consolidation pattern only to see it culminate into a ?bull-trap? being sprung on momentum traders, as prices quickly moved back into the prior trading range. Prices remain above both the 20 and 200-day moving averages (MA) which appear to be converging, and if successful will be the first time the 20-day MA will have crossed above the 200-day MA since September 2013. The 14-week RSI has weakened the past several sessions and is now reading a more neutral 52.56 as of this writing. The ?breakout? high of 133-01.5 remains resistance for the lead month June futures, with support seen at 125-09.
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