The 30-yr bond rallied sharply Thursday on the heels of the FOMC decision Wednesday to increase the target interest rate by 25 basis points, to a range of 1.5 to 1.75 percent.  This came as no surprise, and the market was more interested in the Fed statement.  It was the statement that slightly surprised the bond vigilantes, with the Fed signaling that they will only raise rates three times this year, rather than four.  That is a more dovish stance, which sparked some short covering in bonds among participants who had hoped that the Fed would be more aggressive.  The Fed did announce that it was increasing its 2019 projection from two rate hikes to three, and the 2020 projection from one hike to two.

Early in Thursday’s session the June 30-yr bond future was up 2 points to 145’16 on flight to quality buying, as the S&P future was down over 50 points in a broad-based selloff.  As noted in previous articles, the flight to quality buying which typically accompanies sharp selloffs in equities has been absent the last couple months.  However, bond bulls felt emboldened knowing that the short-term outlook for rates is less aggressive than had been expected prior to the FOMC announcement.

All this being said, the fundamentals have not changed significantly for bonds.  We are still in a rising rate environment, and there is a flood of new paper coming to the market as the deficit is slated to increase sharply with the tax cuts and spending increase.  Even if the bear market in bonds takes a breather, it will most likely resume after a short-lived bounce. 

30-Yr T-Bonds Jun ’18 Daily Chart


Tarik Husseini