US Treasury Bonds rallied to the surprise of many in May, pushing 10-year yields lower to levels not seen from the last 11 months. The result of the meeting by the European Central Bank and data from the job market scheduled to be held in the second week of June will determine the future movement of bond prices.
Cause of rise
The rally by the bond market is due to a number of factors. This includes reduced yields in Europe, increased demand from the pension funds and concern of investors about long term demands from the economy. Apart from that, a number of technical factors like short-covering from entities that held the belief that the economic bonds will head higher are also responsible for the rise.
The spurt in price have pushed the yield on the standard 10-year bonds of the US Treasury to about 2.42 percent. This is the lowest from last June. The yield went even lower when the US Federal Reserve relaxed its bond purchasing stimulus program.
Investors remain to be convinced of the intention of the Federal Reserve to cut the stimulus due to a possible increase in growth. They are wary of economic indicators that remain weak along with non-existent inflation. This perception could change if jobs report show favorable growth or data exhibits gain in price.
As there is still ambiguity about jobs data and the manner in which the ECB will take action, the bond market will remain on tenterhooks. According to David Keeble of Credit Agricole, a report showing decent job growth means that the economy is improving. A Reuters poll has revealed that about 215,000 jobs have been added in May, after an addition of 288,000 jobs in April. This was the strongest gain since January 2012.
As the labor market recovers, it is insufficient to lead to a rise in wages, the most influential factor to ignite concerns about inflation. According to Quincy Krosby, Market Strategist, Prudential Financial, the important factor is the rise in wages and expectations about inflation going higher.
Many expect that the ECB will make a more proactive action announcement in the coming weeks to give an impetus to the EU economy. This will help push European, and US yields from bonds down to levels that have rarely been recorded before. Spanish and Italian benchmarks have dropped, making the rates of the US comparatively attractive. Another factor contributing to low yields is the attempt by investors to exit bets made earlier on yield rises.