Bond Market Pressures Build as Summer Drags On

There are times in markets when the forces of change seem to move as slowly as the tectonic plates that make up the Earth’s crust. This is one of those times for the U.S. bond market -- but don’t take that to mean there aren’t some acute pressures building beneath the surface.

After a sharp rise in the second half of 2016, volatility in the rates market has fallen to historic lows this summer, and yields on 10-year Treasuries are stuck in the middle of an already tight range of about 2.15 percent to 2.40 percent as both bulls and bears move to the sidelines and wait for the next set of data that establishes a trend. The bond bulls point to four straight weak core Consumer Price Index reports, which have dashed any concern that inflation will soon accelerate. The bears point to a strong labor market, albeit one with little wage growth, and a pending increase in the supply of longer-term debt securities to finance a growing U.S. budget deficit. Their case has been strengthened by signs of a recent inflationary impulse in many commodities markets, especially in the metals sectors dominated by Chinese demand.