Updated: 10-05-2015

Bond Rally Fails to Hold
Updated: 02-Oct-15  05:08PM ET
Analyst: David Kelland

In last week's column, I suggested that the current bout of stock market volatility will create a good opportunity to sell 10 and 30-year Treasuries as investors run to safe havens. It has not been my base case scenario that the August low in the major stock indices would hold through the end of the year, but that has to be respected as a potential outcome after today's vicious reversal despite bad news.

The Friday release of the September Employment Situation Report caught markets far off guard. The U.S. Dollar Index dropped by a full percentage point, the S&P 500 futures sold off 44 points high-to-low, and the 10-year yield fell 14 basis points from Thursday's close to double-bottom at the August 24th low.

Despite all of the mayhem, stock futures closed above their overnight highs and the 30-year bond yield closed above its 200-day moving average. Moreover, WTI crude managed to hold the $44/bbl. level this week and the gold market saw some enthusiasm off of the employment report. The former will relieve downward pressure on headline inflation and the latter is indicating that investors are not as confident that the Fed is keeping inflation at bay.

A $30 rally in gold is not cause for concern, but it's been beaten down quite badly over the past three years and there is potential for a shift in sentiment. With jobs being added to the U.S. economy (even at a slower pace) wage growth will eventually follow. The February lows in long-term interest rates were caused by a perfect storm of declining oil prices, a strong U.S. dollar, and considerable if diminished labor market slack in the U.S. economy. That storm is unlikely to be repeated.

There have been a lot of good cards dealt to bond bulls this summer and fall in the form of an emerging market slowdown, lower commodity prices, and falling global equities (all of which are related). The panic today couldn't push the bond yield back near its August low, and it still looks like we're making higher lows. Sell-offs in bond prices should therefore be respected.

David Kelland, Briefing.com

 30-Year Treasury Bond Yield

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