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June 20, 2017

Bond yields plunge while Fed tightens M supply – what’s happening?

Bond yields plunge while Fed tightens M supply – what’s happening?

Dollar gained on Monday as FOMC lifted the rate last week while signaling it will tighten money supply pulling up open market operations. According to the central bank briefing, the primary way of maintaining its tremendous-size balance sheet called reinvestment policy will come to a halt, thus leading to a drop in demand on the bond market. Such move aims at steepening the yield curve, but this time something abnormal happened – treasuries yield have been seemingly ignoring Fed’s statement, extending declines:

This has a profound explanation, though. The path for decline has been set after the release of lackluster inflation figures, which showed consumer prices slowed growth to 1.9% in May from 2.2% in April. Retail sales hit off the mark as well, decreasing 0.3% in May. 5-year forward rates, one of Fed’s gauges for inflation expectations has been remaining on the downward path from the end of March, shrinking from 2.2% to 1.8% in May.

Bond price is negatively correlated with inflation as it basically expresses the pace of depreciation of the bond value in time. Weaker inflation projections released in the US spurred demand for treasuries and as a market factor it outpaced negative impact from the monetary tightening expectations. Declining yields may be a signal of rising concerns that further Fed policy tightening may derail sustainable inflation pickup in the US. Further data on consumer inflation and expenditures are crucial to evaluate the impact of July rate increase while greenback have a room for further growth as it reacts straight to the anticipations of shrinking money supply.

Trading call for EURUSD is 1.1150, TP 1.1060, SL at 1.1230

Oil prices went into selloff on Monday as traders expect that commercial reserves in the US will shown an increase last week. WTI advanced to $45.00 but later fell sharply, finding support of 44.30 level. Next target for oil is $40, because there are no significant catalysts for growth the commodity could avail of. Russian ruble advanced and show signs of growing uncertainty among carry traders on Dollar gains, declining oil and rate cut by Russian Central bank which plans to extend easing on next meetings.

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