U.S. bond yields rallied this week in response to several factors including uncertainty surrounding the French presidential election and the recent dovish language of the recent Fed minutes.
Why are bonds rallying when many believe that there is still room for rates to continue to climb? It seems as if the bond market does not fully buy into this recent equity rally, in which all major indexes are at all-time highs. Earlier in the month, Goldman Sachs stated that the market was trading at “maximum optimism”. Bond traders know instinctively that things don’t often go as planned. There are also mixed opinions as to whether the Fed will act in March and raise short term interest rates. If rates continue to remain low, bond traders may be in the process of adjusting their positions in response to this assumption.
We’re seeing more economic data that support a rise in inflation and predict continued low unemployment. Due to these factors, we are cautiously biased towards carefully floating interest rates with an eye toward locking at the first sign of a reversal of these lower rate trends.