Bond Binge Busts

09/11/2019 12:54 pm EST

Focus: BONDS

Adam Button

Co-Owner and Managing Director, ForexLive.com

After a month-long rally taking Treasuries to historic low yields, bonds have reversed course, notes Adam Button.

Rising Treasury yields are telling a story of a market that's rethinking the path of interest rates and the global economy. The U.S. 10-year Treasury yield up 10% so far on the week, the biggest weekly percentage move since November 2016 — the week of President Trump's victory. Four weeks ago, yields posted the biggest weekly decline since 2012. The euro is the weakest currency ahead of tomorrow's European Central Bank decisions while gold attempts to regain $1,500. The long Premium trade in DAX 30 was closed with a 620-point gain. A Treasury auction on Wednesdays will be a test of real demand for bonds. 

The trend of rising Treasury yields gathered momentum on Wednesday with yields rising about 9 basis points across the curve. That brings the cumulative total to 10-year yields since the lows of last week to more than 30 basis points with a yield at 1.74%.

The uniformity of the move across the curve suggests it's less about near-term Federal Reserve expectations and more about a falling demand for safety. The market continues to completely price in a Sept. 18 FOMC cut with the chance of another 25-basis-point move at 60% for October.

Yet, the tone around US-China talks continues to improve. The South China Morning Post outlined more details of talks and revealed that officials are circulating a text for a short-term deal on delaying tariffs in exchange for agricultural purchases. That's been floated before but it was coupled with talk on a broader offer of better Intellectual Property protection and a cut in excess industrial capacity in exchange for dropping complaints about subsidies and reform of state-owned enterprises.

Few in markets believe any deal will last but President Trump is difficult to handicap and the situation could easily get better before it gets worse.

That brings us back to bonds. The swan dive in yields began when President Trump announced tariffs at the start of August. The 10-year is now nearing the 50% retracement of that move at 1.76%. That's a first level to watch but a bigger one may be the 61.8% Fibonacci retracement level at 1.84%. If that breaks, it would be a sign of a broader rethink rather than a simple retracement. Japanese yen traders are watching rates closely. USDJPY is on the cusp of testing its 100-day moving average near 108.19 for the first time since May.

Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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