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Putting the Rise in Bond Yields Into Perspective

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Investor-UpdateBond yields have suddenly found themselves in the financial headlines. Since Donald Trump became president-elect, the yield on the 10-year Treasury has risen from 1.86% on Election Day to a near-term closing high of 2.22% on Tuesday. That is nearly a half-percentage point jump in just seven days. (The closing yield was slightly higher today, Thursday, at, 2.28%.)

The move extends what has been a longer trend in bond yields. Since hitting a low of 1.37% on July 5, 2016, yields have trended upward. The move hasn’t been steady—yields temporarily fell back following the Federal Open Market Committee’s September meeting—but it has occurred. Yields particularly gained upward momentum in October before making their very recent big jump.

Fiscal plans by the president-elect are being attributed to as the reason for the post-election move. Trump wants to cut taxes and invest significantly in infrastructure. Bond traders are betting on more fiscal stimulus leading to more debt, as well as the possibility of higher inflation. Notably, in the background of this, expectations for rate hikes by the Federal Reserve remain tame. The CME’s FedWatch Tool assigns a 70% probability to the Fed’s target being no higher than 1% at the November 2017 meeting. Assuming a rate hike is announced at next month’s meeting—the futures market is assigning a 91% chance of this occurring—traders are anticipating just one additional rate hike during the first 11 months of 2017. Though the 2017 odds are very much subject to change, they stand in sharp contrast to recent reports about money being shifted from traditional bonds to inflation-protected Treasuries (TIPS).

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The Week Ahead

The U.S. financial markets will be closed on Thursday in observance of Thanksgiving. The U.S. stock exchanges will close early on Friday, at 1:00 p.m. (Eastern). On behalf of everyone at AAII, have a great holiday with friends, family and delicious food!

Third-quarter earnings season continues to wind down with just 13 members of the S&P 500 scheduled to report. Those companies include Tyson Foods (TSN) on Monday; Campbell Soup Company (CPB), Hewlett-Packard Enterprise Co. (HPE), Hormel Foods Corp (HRL), HP (HPQ) and Medtronic (MDT) on Tuesday; and Deere & Company (DE) on Wednesday.

The week’s first economic reports will be October existing home sales, which will be released on Tuesday. Wednesday will feature October durable goods orders, the November PMI Manufacturing Index Flash, October new home sales, the University of Michigan’s revised November consumer sentiment survey and the minutes from the November Federal Open Market Committee. Weekly jobless claims data will also be released on Wednesday, a day earlier than normal.

The Treasury Department will auction $26 billion of two-year notes on Monday; $13 billion of two-year floating-rate notes and $34 billion of traditional five-year notes on Tuesday; and $28 billion of seven-year notes on Wednesday.

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