The bond market moves to test another key level

If anything, it’s a sign that this is a market that’s no longer that afraid – if at all – of tariff threats. A case of the boy who cried wolf perhaps. In this case being the man who cried tariffs. And with softer US economic data recently, traders are coming around to the idea that price pressures may not be that strong by the time tariffs do come to fruition. In other words, the Fed might have scope to cut rates further.

The chart above shows an interesting evolution in the market thinking and how it changed after Trump took office.

The run up in yields last October came as Trump became the favourite to win the presidential election. That was followed by another surge in December as he drummed up tariff threats and a trade war with China seemed imminent.

Fast forward to today and those threats are more words than actions. And traders are learning to sing to that tune despite Trump continuing to make headlines in the past two weeks.

The fact that we also saw Fed funds futures move to price in just one rate cut by the Fed for this year previously is also a factor keeping a lid on rates from pushing too far. And now when we’re running back the other way, it’s a double whammy for rates. Traders are now pricing in ~58 bps of rate cuts with the first one being in July.

Circling back to the 10-year yields chart above, we’ve now reached another critical point in the market pricing. A push to test the 200-day moving average (blue line) after the break of the 100-day moving average (red line) earlier this week.

If that level breaks, bond buyers will have more momentum to keep with the latest momentum. That could drive yields back to test the December low near 4.12% next.

But at this stage, a lot will hinge on more US economic data in the week(s) ahead. The non-farm payrolls release next week is going to be a major one in that regard.

In the meantime, we could be caught in a bit of a battle at this key level until traders find some catalyst to solidify their conviction. Or perhaps they may get carried away and price in another rate cut on their own volition before letting the data decide whether to bring things down a notch.

In any case, the technical backdrop above is the key thing to watch now in the bond market this week. That will determine whether the recent drive lower in yields can hold the course or be met with some pushback for now.

This article was written by Justin Low at www.forexlive.com.