Bonds Continue to be Volatile
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
The U.S. stock market attempted to rally for the first 30 minutes of the trading day on Thursday, then spent the remainder of the session in an orderly decline, with the majority of stocks closing lower. As for the major averages, the Standard & Poor’s 500 index fell 0.86 percent and the Nasdaq Composite index slid 0.79 percent on the day. However, so far this week the story behind the story is the bond market.
Though bonds rallied on Thursday with the Barclay’s U.S. 20+ Treasury index gaining 1.30 percent on the day, the index is still down 2.76 percent over the past five trading days. Of course, lower bond prices mean higher interest rates or, put another way, investors are voting with their wallets and fewer are willing to receive a low interest rate over the next 10-plus years. For example, in mid-April of this year, the 10-Year Treasury bond was paying an interest rate of roughly 1.90 percent, but as of Thursday’s close that same bond is now at 2.30 percent. Of course, the interest rate is so small you would hardly notice the difference between the two if it was your savings account. But, that’s a 21 percent change in yield in a month and a half, which is nothing to sneeze at, and reflects the volatility and sensitivity there is in bonds these days.
One reason interest rates tend to rise is due to inflation concerns. However, the latest consumer price index report for April showed a loss of 0.2 percent over the prior year, though the core price measure, which subtracts food and energy, rose by 1.8 percent over the same period. Higher interest rates from the Fed also doesn’t appear to be a factor, with the federal-fund futures implying roughly a 50/50 chance that the Fed could raise lending rates to .25 percent in September.
The only real explanation for the recent sell-off in higher-quality U.S. bonds appears to be the recent dramatic decline in the 10-Year German Bund. (Yes, it’s pronounced Bund.) The 10-year German Bund closed at 0.84 percent on Thursday after being at a low of 0.1 percent in April. It wasn’t long ago that investors were talking about potentially negative interest rates on bonds. One reason for the recent increase in interest rates in German bonds has been signs of improvement in the various economies throughout the region. Some are beginning to wonder whether quantitative easing is still necessary. However, in a speech on Wednesday, ECB President Mario Draghi warned there would be more volatility in bonds to come, but he also stated that quantitative easing was far from over.
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.