Bond Market Trends Move More in Favor of the Bears

Traders of U.S. Treasuries thought they had glimpsed the long-awaited breakout in yields last week, as all the fundamental, technical and political drivers lined up for an upward move in the U.S. interest-rate structure. That was until the news on Friday that President Donald Trump’s former national security adviser, Michael Flynn, pleaded guilty to lying to FBI agents. Suddenly, the best-laid plans for trading a bear market went awry.

The current milieu of rates trading has become a three-dimensional game of chess, with political shock waves added to the usual economic and bond supply narratives. Most of the puzzle pieces fit into an eventual rise in U.S. rates, but as we saw last week, market nervousness over the Washington scandals can slow -- or even stop -- that path. Ten-year Treasury yields have been locked into a very narrow band for most of the year, and have been confined to an even narrower range more recently.