Q: Why is XBB dropping in price over the last few days? I thought bond prices would rise with the prospect of lower interest rates.
5i Research Answer:
Bond prices generally reflect the changes in interest rates, but more importantly they reflect the expected path of interest rates in the future. XBB has seen its price decline since mid-September, which is around the time when stronger economic data points began to surface from the US. US GDP growth proved fairly robust, the unemployment rate came in lower than expected, and oil prices began rising, signaling that future inflation prints might come in higher than welcomed.
Largely, the week-to-week and month-to-month trends will fluctuate going forward, and bond prices will not go up in a straight line, but we believe that further rate cuts are expected and this should help bond prices over the intermediate to long-term.