High-quality bonds up, interest rates down
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
With the stock market trading in a very narrow range during the past few weeks, so have convertible bonds, with the Barclays U.S. Convertible Bond index gaining a minimal 0.03 percent during the past five trading days.
However, high-quality bonds such as treasuries and corporates declined for a sixth straight session on Thursday, making it the longest losing streak so far this year. The decline follows a recent high on Aug. 31 when high-quality bonds reached their highest price for the year, while interest rates declined to an annual low.
Although the recent decline is growing long in the tooth, the pullback appears to be par for the course with some bond traders deciding to take profits following the August rally. It’s also very possible that the bond market is pulling back into the same trading range we’ve seen since April of this year. Longer term high-quality bonds are near the bottom of our list for the second week in a row with the Barclays U.S. 20+ Year Treasury Bond index declining 1.18 percent during the past five trading days and lower by 3.36 percent during the past two weeks.
However, recent strength in the U.S. dollar is putting additional downward pressure on foreign bonds with the S&P/Citigroup International Treasury Bond index slipping 1.28 percent during the past five trading days and the DB Global Government ex-US Inflation-Linked Bond index falling 2.50 percent in the same period.
Next week’s Federal Open Market Committee meeting will be the next major event for the bond market, as bond traders scrutinize the Fed’s comments for clues about the timing of the Central Bank’s next interest-rate rise. One telling sign might have come from a report from the Federal Reserve Bank of San Francisco on Monday. The report states the public “seems to expect a more accommodative policy than the Federal Open Market Committee participants” — a clear reminder that interest rates could be raised sooner than some investors are anticipating.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.