Bond Market Focuses On Data Releases And Full Calendar Of Fed Speakers

The Federal Reserve statement and Chair Janet Yellen made it clear last week that the timing and pace of eventual Fed rate tightening will be data dependent.

All key U.S. data will now have a larger than normal impact on bond market volatility. The market will also pay close attention to “Fed-speak” and seven different Fed speakers will be appearing by mid-week.

Calendar

Monday brought bad data and reassurance from the Federal Reserve.

U.S. Existing Home Sales were released and they missed expectations. Sales were expected to rise 1 percent to an annualized rate of 5.20 million homes; instead sales fell 1.8 percent to a rate of 5.05 million homes. Fed Vice-Chair William Dudley offered dovish comments.

Monday markets fell sharply.

Related Link: What The FOMC Statement Means For Your Bond Portfolio

Today features four different Fed speakers. The first up, St. Louis Fed President James Bullard, avoided making comments about the Fed's outlook, suggesting a non-event from the market's perspective. The Fed's Esther George, Jerome Powell and Narayana Kocherlakota are all scheduled to speak as well.

Wednesday the Fed's Loretta Mester and Charles Evans are scheduled to give speeches.

Thursday, weekly jobless claims and durable goods orders are due. Jobless claims are forecasted to rise to 298,00 and durable goods orders, excluding transportation, are predicted to increase 0.7 percent.

Friday markets will get the revised second quarter GDP; it is predicted to be revised upward to 4.6 percent.

Yield Curve

The Treasury market yield curve flattened last week. For the week the two-year note edged up one basis point (bp) and closed the week at 0.57 percent. The 10-year note moved in the opposite direction with yields falling four bp and closing at 2.57 percent on Friday.

In the fixed income market yields and prices move in opposite directions. When the yield falls the price of the bond moves higher. The price action of the 10-year note suggests that the momentum is now on the side on bond bulls.

The outside bullish week for the price of the 10-year note, a lower low and higher high with a close near the high price for the week, suggest further price gains in the weeks ahead.

The flattening of the yield curve is expected to continue until the Fed begins its rate tightening. Currently the Fed is expected to start in the second half of 2015. The bond market has (and will continue) to attempt to “get ahead” of the Fed by pushing up yields on the short end of the yield curve.

Two, three and five-year notes will initially be most vulnerable to a rise in the Fed funds rate. Longer term Treasuries such as the 10-year note and 30-year bond will still find strong enough demand to anchor their rates. Look for the curve to get flatter.

Foreign Bonds

Bond yields fell across the Eurozone and closed at their lowest levels for the week on Friday. Investors took heart from the “NO” vote in Scotland. The 10-year German Bund closed at 1.04 and 10-year Spanish bond closed at 2.20 percent.

The low returns in Europe combined with the strong dollar has attracted foreign funds to the U.S. bond market. Eurozone investors have earned higher returns in the fixed income and foreign exchange market when they convert their currency into dollars and buy U.S. Treasury, municipal and corporate bonds. This demand will provide support for the long end of the market and cap 10-year Treasury rates below 3 percent for a “considerable period.”