Bonds & Fixed Income

Bond Bulls Coming Out of Hiding As Bears Retreat From A Dovish Fed

This week’s data was significantly important for traders and investors and will probably influence the market direction for capital markets over the next few weeks. One asset class to monitor is bonds or fixed income. The 10-year Treasury peaked @ April-3-2015 and recently bottomed @ June-11-2015. It has essentially retraced 38.2% of this range but today succumbed to profit taking after Fed Chair Yellen’s dovish FOMC comments on Wednesday.

Summary of FOMC Meeting Announcement

  • The Fed is waiting for Employment growth to pick up, although the slack is diminishing.
  • Economic Growth expectations have tamped down GDP in the 1.8 to 2.0% range vs. prior estimates between 2.3 to 2.7%.
  • Activity in the Consumer sector is moderate.
  • The Housing market is improving, but moderately.
  • Business investments and exports continue to remain soft. (My take is that the Fed also recognizes the headwinds of a stronger US Dollar.)
  • Inflation is gradually rising to its 2% target.
  • Overall the economy and labor markets remained balanced.

So where to from here with 10-yr notes? Although the longer term outlook for bonds remains bearish, the triple bottom on its daily chart sets indicates sufficient price support and high probability for a bullish continuation move to test 127’100 and 127’300. First the 10-year note needs to clear resistance @ 126’200 and doing so would likely initiate a new short-term uptrend that could even push prices to as high as “129ish” levels.

Lending fundamental support is the uncertainty of exactly when the first rate hike will occur. The market was taking for granted that it would occur in September-2015. Yet, now some analysts are extending this out to December, which takes the potential for 2 rate increases before yearend off the table.

 

10-yr-tsy_daily-6-18-2015
click to enlarge

 

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