Equity markets surged higher as the Trump rally continues at the expense of bonds. The 10-year U.S. Treasury Bond rose to 2.467%, but closed below the psychologically important 2.500% mark. We were somewhat encouraged earlier in the week by how U.S. bonds responded to the European Central Bank’s (ECB) remarks about trimming their quantitative easing (QE) programs next year. One would think that the reduced monetary stimulus would have major negative impact on bond yields. This has yet to prove true, but Friday’s sell-off in the bond market could mean bond yields will go higher.
All eyes will be on the Federal Reserve next week as the futures market has all but confirmed that the Fed will be increasing short-term overnight lending rates. With a hot stock market, unemployment under 5%, and a pro-business administration about to take office, there is no reason not to increase. Experts have stated that this Fed increase has already been backed into the bond market and the reaction to the Fed’s increase will be a non-event.
We continue to watch both the equity and bond markets carefully. It is hard to argue against locking interest rates as they are swiftly rising, but one can make the argument that equity markets may have gotten ahead of themselves and that bonds are due for a positive bounce.