Geo Political Concerns Push Bond Yields Lower as Fed Increase is “Certain” for Next Week

The 10 year T hit a 2017 low of 2.13% this week, before bouncing back up to 2.17% today.  Several global factors are contributing to lower bond yields including: (1) Middle East diplomatic crisis as other Arab states are attempting to isolate Qatar.   As Qatar is a major oil producer, the involved countries are OPEC members, and other countries are starting to take sides (Turkey sending troops, etc).    The uncertainty and potential oil price concerns contributed to a flight to quality; (2) China is buying Treasuries again.   The world’s largest holder was selling during 2016 in order to bolster the Yuan.   With the currency now stabilizing, China can resume its purchases; (3) “Brexit” is back, the UK election is tightening, markets prefer Theresa May’s conservative party to hold on to power in order to assure an orderly exit from the European Union.   A new leader may result in a chaotic exit; (4) Back home: Former FBI Director Comey’s scheduled testimony for tomorrow was also a “fear factor” until the advance release of his opening statement lacked any major bombshells.   On the economic front, last week’s employment report was lacking in job creation and wage inflation, further dampening growth/inflation expectations. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.