Rumbles in the Bond Market

Aerial photograph of Geological landform, Mersin – Turkey

Disclosure: this post is intended for educational purposes only and shouldn’t be viewed as a recommendation.

For a long time, investors have warned about a selloff in bond prices. This week the rumblings seem to be getting louder.

“Bond Market Is Less Liquid,” the Wall Street Journal declared on its front page this morning. The article then outlines how it’s getting harder to buy and sell debt securities without impacting price. It cited illiquidity in in Italian bonds two months ago as big example.

The article, like several others on the subject, see diminished  “quantitative easing” (QE) as a major cause for the choppiness. QE was the Federal Reserve’s policy from 2012 of buying bonds to keep interest rates lower. But now that the economy’s stronger, policymakers have scaled back their purchases. In the process, they’ve removed a buyer from the market.

Other buyers also seem to be on strike. President Trump, for instance, has demanded countries like China stop manipulating their currencies. One key way they can bow to that pressure is to purchase fewer U.S. Treasury bonds.

Traders may also want to keep an eye on the calendar because some upcoming events could have a big impact on bond prices:

  • Tuesday July 24: U.S. Treasury to Auction 2-year Treasury notes
  • Wednesday, July 25: U.S. Treasury to Auction 5-year Treasury notes. (@FV is the symbol for the futures)
  • Thursday, July 26: U.S. Treasury to Auction 7-year Treasury notes. Durable-goods orders are due and the European Central Bank will announce monetary policy.
  • Friday, July 27: Second quarter gross domestic product is due at a time that the economy seems to be its strongest in several years — a potential negative for bond prices.

Volatility in bond prices can impact several securities such as the U.S. Treasury Bond futures (@US), tracking the 30-year instruments. The SPDR Utility ETF (XLU) and an income stock like AT&T (T) tend to follow bond prices. Big banks and financials tend to move in the opposite direction.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.