Running of the Bond Bulls — Evening Brief – 08.22.24
The fixed income markets have taken on a more bullish stance over the past several weeks and ahead of Federal Reserve Chair Jay Powell’s speech at the Jackson Hole Symposium in Wyoming on Friday. He is widely expected to provide hints about the outlook for monetary policy for the remainder of the year – hints that likely point to rising lower bond yields.
Heading into the Jackson Hole confab, the overwhelming consensus among market participants, and the “vast majority” of FOMC members, is that the central bank will begin to cut interest rates in September. This perspective is supported by many variables, including projections of slower U.S. economic growth and the trend towards disinflation.
The technical picture for several key sectors of the fixed income markets indicates the downtrend in yields will continue, based on several proxy exchange-traded funds (ETFs).
While fixed income started the year with mixed results, Connect Money has noted that the probability favored a return of the down trend in yields. The jury may still be out with regards to whether this is a counter-trend rally within the broader advance or the onset of a more protracted decline, but if economic growth sputters and the Fed takes on a more aggressive stance in its easing cycle then the odds favor a steeper decline.
Examining a broad measure of investment-grade bonds using the Vanguard Total Bond Market (BND), it is clear the ETF has been in a strong uptrend since May and the wide dispersion between its 50-day moving average and 200-day moving average (a bullish indication) suggests the trend remains positive.
An analysis of an investment-grade corporate ETF (LQD), which rallied to its highest level in over two years on Tuesday, and the strong uptrend (in price) of medium-term US Treasuries (IEF) indicate a similar positive trajectory. Furthermore, there are few indications that the solid upward trajectory of below-investment-grade bonds (JNK) will reverse. JNK has extended the present phase of a multi-year rally that began in late 2023.
A reflationary resurgence and/or stronger-than-expected economic growth are potential factors that could impede the fixed income market’s momentum. Presently, U.S. economic data published over the past couple of months suggests that both scenarios have relatively low odds of materializing. For example, U.S. growth in the third quarter is predicted to print at a slower rate than in the second quarter. Meanwhile, consumer inflation in July continued to show a deflationary tendency.