Bonds Are Crumbling Before the Fed

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Bonds are getting hammered with the Federal Reserve set to hike rates next week.

The yield on 30-year Treasuries ($TYX.X) has risen about 19 basis points (0.19 percentage point) so far in September. If that pace of increase continues, it will be the biggest monthly gain since President Trump’s election in November 2016. Bond prices, which move in the opposite direction, are down sharply as a result.

The move comes ahead of the Fed’s next meeting on Wednesday, September 26. Economists have expected a 25-basis point rate hike for months, but recent weeks have brought a growing sense there will be further tightening in 2019.

The federal government has also boosted spending into the end of its fiscal year on September 30. That can push rates higher by stoking the economy and by increasing Washington’s need to borrow. Separately, the Treasury Department just reported that China bought less U.S. debt amid its trade wars with President Trump. That also depresses bond prices and therefore lifts rates.

Policymakers abroad are moving in a similar direction. Just last week the European Central Bank said it would continue to inch its super-low rates higher, while Turkey hiked aggressively. Both of those developments give the Fed elbow room to raise U.S. rates without triggering a global-currency rout.

Conditions in this country seem to support further hikes as well. Initial jobless claims, for instance, are at their lowest levels since 1969 and the number of available positions has exceeded the ranks of unemployed for several months.

Recent sessions have also seen a shift of money away from utilities (XLU) and real-estate investment trusts (XLRE). Those are typically viewed as income sectors that benefit from low rates. Both were outperforming until recently.

In conclusion, bonds and even some stocks are starting to move as the market prepares for higher interest rates — not just next week but well into the future.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.