Bonds losing steam?

Are we seeing the beginning of the end of bull stampede in bond prices?

The F-fund may not be outperforming the TSP stocks funds but it has certainly been outperforming itself. Bonds have been on a steady climb since the end of last year adding more than 6% to the F-fund in just 6 months after just making it above even for 2018.

Well last week we saw signs of trouble for the bond market after new economic data and the testimony by Jerome Powell both signaled rising inflation. This led to decrease in appetite for bonds by investors last week who bid for less than 80% of Treasury notes and bonds after averaging 93% for the rest of 2019.

If the Federal Reserve does cut rates as most think then that will likely add to the bear argument for bonds. Inflation tends to rise with monetary stimulus. Bond prices tend to fall when inflation rises.

The index is trending down so far in July but as I mentioned in this week's TSP Talk Weekly Wrap Up, it has to flirt with its 20-day EMA. After falling below last week its back above the moving average today. Starting to look similar to last time the index price and the 20-day EMA intertwined back in April where prices continued to climb after a few days of jumping around the moving average. But is this time different?

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TommyIV

Today AGG fell early but caught the 20-day EMA as it low. I can't help point out how similar the action so far in July resembles the trading action around the 20-day EMA in mid-April to early May. In both cases the price jumped between the moving average for a few days then the price perked up for a few days before falling to test the 20-day EMA again. That's where we are today.

In May bonds rallied for the next two months following. Nothing tells us that the future will resemble the past so I'm not seeing a certainty but an interesting pattern. But what is the advantage of buying bonds with interest rates already so low? Lower volatility in bonds means less risk and a potentially less damaging exit if things go south compared to stocks. So it uncertainty in stocks that moves investors to bonds. The Fed has added a lot of uncertainty lately with their shift in sentiment and mixed messages on rate hikes. Ironically one reason to raise rates is an attempted to 'correct' the bond market.


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Repeat of July? After a month long climb in a rising channel bonds are back to testing the 20-day EMA, just as in July. We have seen three times this year where AGG traded below its 20-day EMA. In each case the index regained footing after a few days and continued to trade above the moving average. Well its looks like we're seeing it again. A similar trading pattern is forming as we saw leaving June and entering July where the index is falling from a rising trend and is now testing the persistent support of the 20-day EMA. In July the moving average held as the base all month before the index rallied in August.

The two economic situations are not too different. The July action was leading up to a FOMC meeting as we have next week. Most are expecting a rate hike as was expected then. Uncertainty in trade has not changed too much. There may be more uncertainty now but investors were comforted last week with the prospect of trade talks resuming in October. I guess the real question aside from technical consistency is if investors are ready to jump back into stocks with the S&P500 within 2% of its July highs. Or is the desire for bond yields slowing down? It all depends on how the greater market feels about the economy in time.

Outside of bonds, safer stock market sectors (sometimes referred to as bond proxies) are seeing an outflow. This could signal that optimism about the economy is growing again. But we all know how quickly a tweet or headline can have investor back running for cover.

Stock-market investors’ appetite for ‘bond proxies’ is waning


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Some targets for the 10-year yield, if this is just a bounce...
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AGG has broken below 20-day EMA and looks like it could be headed to test its 50-day EMA for the first time since November. So far the July repeat theory has diminished. The outcome of the FOMC meeting may be the determining factor of whether this is a buying opportunity or the end of bonds 2019 success.


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Yields peaked at the 50-day EMA so far today.

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Thanks for this set of posts; I have been watching this closely - in addition - this money coming out of bonds has to be going somewhere else; probably small caps.

Momentum has flipped and gaps are filled. AGG is trading below its 50-day EMA for the first time this year. Bonds are officially out of character for the year.

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Yields too filled a gap and are on the other side of the 50-day EMA.

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Bonds have seemed to already outrun long-term trends and the index looks ready to correct and re-enter a long-term trading channel:

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The bond market has climbed back above its 50-day EMA. That includes slight gains today despite the Fed cutting rates. The geopolitical tensions in the middle east gave life to bond buyers seeking safety. The 20-day EMA kept a cap on today's highs; makes sense ahead of an expected rate cut.

What next? Investors will be analyzing the Fed's statements. Naturally they will be asking where their money will be best put to work. Bonds have been consistent all year and seem to be rebounding off the current sell-off. Stock markets are fading off the recent highs which to me means those invested will be quick to sell stocks if they sense buyers are not willing to pay more than ever for stocks. It makes less sense to buy and hold stocks when we just came off a steep stock sell-off in early August and the arguments and indicators for a recession are adding up. So any sign of actual trouble for the economy could quickly spark bonds back to life . I don't know about anyone else but its hard for me to be too bullish in stocks over the next couple months.

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After a week and a half of jumping between the 20 and 50-day EMA, AGG broke below and closed the 50-day EMA. Nothing too significant but worth noting for now. The open gap was not completely filled last week but the gap is now above the 20-day EMA. The index only closed two days below the 50-day EMA last month before resurfacing.

Brexit seems to be coming along, the trade war is on a lighter note with the mini deal being worked out, and the Fed is expected to keep rates low. Investors are tip toeing out of bonds and into riskier assets. For now.

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What's moving bond prices?

Quote:

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U.S. Treasury yields fell Tuesday as trading appeared to track the progress of political developments, including U.K. Prime Minister Boris Johnson’ Brexit deal, which met some struggles to make its way through Parliament.

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Treasury yields fall as Brexit deal faces some uncertainty after key votes

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Money continues to be thrown into bonds today despite the relentless rise in stocks. How come? A contributor could be portfolio re-balance by large fund managers who are locking in gains for the year and using long term bonds as insurance. Another thought is euphoria and momentum is driving stocks higher but there is real concern behind the mania about the direction trade negotiations are going and how that will effect the economy next year. Stocks are rising but expensive and bad news and poor economic numbers have not gone away.

Bonds have essentially leveled out since August's rally but have shown life recently while heading towards previous highs of the last few months.

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