Volatility in both stock and bond markets has subsided a bit for now. The S&P 500 has been stuck in the mid 1900’s, while the 10 year treasury has traded in a fairly tight range of about 10 basis points for the past week. However, I would not expect the sideways movement of the past week to continue much longer. Everyone is looking ahead to the Fed’s September meeting this week, and that could very well be the catalyst that gets markets moving again. The market odds of seeing a rate increase in September are still at about 30%, but I am on the side that thinks the Fed will try and raise rates this month.
One of the thoughts that is now gaining some steam is that if the Fed does raise rates, it could send foreign equity markets, especially emerging markets, tumbling lower. An increase in rates may simply add fuel to the fire that has been started in China. It’s tough to say how a rate increase would actually affect bond markets. Short-term rates will certainly be the most exposed, but if the market has already priced in the move, which it has a tendency to do, then we may not see a jump in rates at all. If equity markets do head lower it could potentially cause the opposite effect if a flight to quality ensues and prices increase.
On the 10-year treasury chart, smaller support and resistance is shaping up around 2.25%, and 2.11%, with the larger trading rang being from 2.40% down to 1.90%. As of this morning, the 10-year yield sits squarely in the middle at 2.17% giving us little indication of which direction markets will be headed after the Fed concludes its meeting. That should be the story all week.
Eric Swanson, CFA