Why US bonds could fall despite looming Fed cuts
Dow, S&P 500 off; Nasdaq up slightly
Healthcare leads S&P decliners; cons disc biggest gainer
STOXX 600 down ~0.5%
Dollar, crude, bitcoin down; gold up
U.S. 10-yr Treasury yield down at ~3.74%
Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com
WHY US BONDS COULD FALL DESPITE LOOMING FED CUTS
Conventional wisdom suggests that with the Federal Reserve set to cut interest rates this month, U.S. Treasuries are also poised for a big rally, meaning lower yields. But according to Jay Kaeppel, senior research analyst, at research firm SentimenTrader, investors should hold fire before jumping on the bonds bandwagon.
So far this year, the benchmark 10-year yield US10YT=RR has fallen 11.6 basis points.
Kaeppel writes in a research note that there are plenty of reasons not to go with the trend, noting that "the big picture for interest rates is unfavorable." His technical charts project a generally rising rate environment until 2040.
He notes that yields tend to move in "very long-term waves" and identifies a 60-year cycle, with about 30 years of falling rates followed by another 30 years of rising rates. He points out that the latest rates cycle bottomed out in 2010 and currently we are in the midst of a rising rate environment. Within that cycle, however, are minor dips that are expected in a long-term trend.
"This cycle is by no means 'exact'," Kaeppel writes. "Interest rates did not bottom out until 2020, and there is no 'guarantee' that rates will rise until - nor top out in - 2040. Still, if this chart tells us anything, it is that interest rates may be more stubborn to sharp declines than most investors currently think."
Kaeppel also cites his very own JK Bond Cycle Thermometer and Bond Cycle Model, which he says are flashing bearish signs. These models, he adds, are based on long-term cycles in interest rate trends. The good news, he says, is that they have a solid track record in backtesting. But the bad news is that they are not very price-dependent and so if bond prices show a meaningful rising-price trend, these models can sometimes fail to keep track.
That said, Kaeppel points out that both indicators are flashing unfavorable signs for bonds. His models have a win rate of 31% a year later, following previous zero readings. While that does not guarantee that bond prices will fall in the next six to twelve months, they do provide an objective warning sign, he says.
"With the caveat that these models could be proven wrong at any given time, they stand objectively against the current bullish crescendo for the inevitability of higher bond prices," Kaeppel writes.
(Gertrude Chavez-Dreyfuss)
*****
EARLIER ON LIVE MARKETS:
IS THE TIDE TURNING FOR EUROPEAN REAL ESTATE? - CLICK HERE
JOBS, JOBS, JOBS - WITH A SERVICES SECTOR CHASER - CLICK HERE
WALL STREET MIXED AFTER JOBS DATA, AWAITS US NONFARM PAYROLLS - CLICK HERE
S&P 500 E-MINIS NEAR FLAT; TRIM LOSSES AFTER JOBLESS DATA - CLICK HERE
DEUTSCHE BANK TAKES A SHINE TO THE CONSTRUCTION SECTOR - CLICK HERE
BUYBACKS TO THE RESCUE - CLICK HERE
RATE-CUT LOVERS STEADY THE STOXX - CLICK HERE
EUROPEAN STOCK FUTURES EASE - CLICK HERE
MARKETS HIT TENTATIVE PAUSE ON SELLOFF - CLICK HERE
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
