The bond market continues to stymie the bears who are adamant that the stage is set for a normalization of the interest rate structure (shift upward) as QE wind down commences and looming tax cuts are set to raise deficits significantly. The Feds are on track to raise short rates next month and possibly another three times in 2018 but the market remains skeptical about this course of action since economy is without any serious inflationary pressure even with amazing low unemployment levels . This doubt triggered a powerful curve flattening trend that’s overwhelming any lingering bearishness. Remember back at the end of last year the post election stock euphoria had put bond market under a cloud. Although stock market continued climbing relentlessly as 2017 progressed the bond price action never continued to trend lower. There are for a few good reasons. Number one is the relative attractiveness compared to other countries and especially long- term European rates. Since ours are significantly higher the flow of money from around the world into U.S. treasuries continues regardless U.S. fed’s slow motion tightening mode on the short end of the curve. It looks like the market is willing to bet that by embarking on this normalization without any inflation in view the fed will eventually offset any near term fiscal splurge if tax cuts get thru congress. Therefore a major reason for the cloud bonds started the year under goes poof.
Recent price action has been positive for the bulls as market has been able to ignore the powerful push up in stocks this fall. We’re 4 points or so over the October lows but the outright trade’s been difficult and will most likely remain so with resistance at the 155 handle continuing to put a lid on the market. What hasn’t been choppy is the relentless flattening of the curve as ZFH8 and ZTH8 trend down under the weight of fed actions and ZNH8 and ZBH8 are supported by international money and some faith out there that inflation is not going to blow up. Look for more of this over the next few weeks.