The Bond Market’s Latest Rally Is No Knee-Jerk Reaction

The bond bulls are in charge.

Photographer: Michael Nagle

Many pundits are describing the latest move in the bond markets as little more than a knee-jerk reaction to rising geopolitical tensions amid a broader risk-off environment. They'd be wrong.

Unlike many previous squeezes in U.S. Treasuries, this latest move — which has pushed yields on 10-year notes to the lowest of the year — is important because it came without the usual signs of wretched excess in the form of speculative over-positioning. Although this rally has had its share of momentum players seeking to ride the wave, those types have been bullish for months and did little to exacerbate the move.

This time, the message from the bond market to the Fed is emphatic: There is a minimal need for further interest-rate increases once policy makers begin shrinking the central bank's $4.5 trillion balance sheet this month. The U.S. political and global security environments, along with little to no inflationary pressures, have altered the rate hike narrative, despite the very healthy 3 percent growth rate in gross domestic product for the second quarter and decent jobs growth.