Daily Commentary BY THE CURVE TEAM –

Bonds and Volatility

January 11th, 2018

Expect to see those two words mentioned a lot in 2018. Earlier this week it was the BoJ’s tweaking of its bond purchase program that threw the cat amongst the pigeons. Overnight it was China’s turn with a Bloomberg report further stoking volatility, which quickly spread to other markets.

A Bloomberg report surfaced overnight stating that senior Chinese officials “have recommended slowing or halting purchases of US Treasuries”.  Given how big a player China is in the US treasury markets, the story drew an immediate reactions from markets.

The bond bid evaporated sending yields higher while the USD came under immediate pressure and equities hit the skids. Many of the moves have since reversed some or all of the knee jerk reaction but it is a telling sign of things to come.

At a time when the FOMC is running down its holdings, more news of a fall in the demand for bonds will only reinforce the recent break higher in yields. The price action overnight also shows just how complacent markets have become. While the old adage that ‘the trend is your friend’ was in full flight in 2017, there are many ready to jump ship at any sign of a turn around.

A big day for local data today with the release of retail sales numbers for November. The market is looking for a solid increase of 0.4% on the back of October’s 0.5% rebound.

David Flanagan

Director - Interest Rate Markets