For Bond Traders, 2018 Won't Be Business as Usual

Around this time of year, most financial columns endeavor to divine what’s ahead. And most tend to have some form of the same disclaimer made famous by New York Yankees Hall of Famer Yogi Berra: “It’s tough to make predictions, especially about the future.” With that in mind, here’s an attempt to provide a sense of what to expect in the U.S. bond market for 2018.

To understand where the market may be headed, it’s important to take a quick look back at 2017, which was one of the dullest years in the history of fixed income. Benchmark 10-year U.S. Treasury yields ended less than 5 basis points from where they started 2017, marking the least amount of volatility in 40 years -- due largely to benign inflation. Shorter-term maturities were a different story, as two-year yields moved steadily higher from less than 1.20 percent to above 1.90 percent. The bear market in this part of the curve was a reflection of the Federal Reserve’s resolve to raise interest rates and start shrinking its balance sheet along with a strengthening economy.