China Threat Hurting the U.S. Bond Market

Mortgage interest rates continue to move higher once again this morning, in what seems to be the continuation of a technical move. The 10 Year Treasury Note yield has broken above a long-term trend line which is causing some major bond traders to predict the end of a 25+ year bull market for bonds. The changing trend would support our belief that interest rates will continue to move higher as the weeks and months move on.  Although this never happens in a straight line, it seems likely that we will see higher mortgage rates in the near term.  How high will they go?  Not too much to worry about.  It’s highly unlikely that rates will move too sharply.  In truth, we doubt we will ever see an 8% mortgage interest rate in our lifetimes.

Further adding to the bond market’s troubles, China is said to be weighing whether they will purchase U.S. Treasuries in the future.  Senior government officials in Beijing have suggested halting future purchases at a time when trade tensions are escalating between the two countries.  Chinese investments into the U.S. have been used as a political weapon to help strengthen hands in negotiations that impact our joint economies.  Whether or not China will follow through on this threat remains to be seen.  Although the Chinese investments into U.S. Treasuries have been significant, they are still just a drop in the bucket compared to the over-all Treasury market.  Therefore, the negative bond market reaction seems a bit dramatic.

Since bonds had a gap-down opening, there is hope they will recover as the day wears on.  Gaps tend to close.  There is also a good chance that we will see bonds make a bounce higher from this level.  However, the risk/reward equation still favors a locking bias.