Bonds

Bond markets stabilize after a series of chaotic events

  • A sharp decline in bond yields stabilized on Friday following a Fed $75 billion capital injection to the financial system
  • The bond market had been affected by a series of chaotic events including interest rate cuts, US-China failed negotiations, and the Brexit
  • Most bond markets around the world are now experiencing positive yields

Traders are crossing their fingers and hoping that the Federal Reserve’s Wednesday interest rate cut would be last for some time. The central bank is next week expected to comply with the Fed’s changes and consequently lower its target policy rate to between 1.50% and 1.75%.

 The interest rate cut would be the third in a row in what has been described by the Fed Chair Chairman Jerome Powell as a “midcycle adjustment. The recent interest rate cuts have been some of the hardest sells for Powell who has been struggling to convince traders that bet on easier policies than what the Fed has been pushing for this whole year.

But in the last couple of weeks, traders have pared wagers on more assertive cuts and abandoned hedges against volatility. Eurodollar futures activities suggest that traders prefer stable rates at the moment. The mood is a result of heightened fears of unsuccessful negotiations between the US and China as well as the UK’s Brexit deal.

“We’ve seen a mood switch to optimism on Brexit, optimism on the trade front,” head of US rates strategy at Société Générale, Subadra Rajappa said. “This might be the most opportune time if the Fed does want to pause, to go ahead and suggest that.”

As of last Friday, the difference between two and ten-year bond yields had moved from four to seventeen base points since the beginning of this month. Similarly, the longer-dated benchmark has also shot from 1.50% to 1.80% in the same period.

But analysts warn that the stability might not hold for so long. Last week, concerns were raised about the outlook of the US growth, with experts predicting a possible Fed rate of zero as we approach 2020.

On Thursday, the DE Shaw group director of Global Economics Brian Sack had told attendees of the International Finance conference that “we either stabilize with one more cut, or I think we’re going to go all the way to the lower bound.”
The US government bonds remained stable for the better part of Friday to today after the Fed injected $75 billion to the economy to stabilize short-term money markets. Meanwhile, the situation is the same in most major bond markets including the UK and China.

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