Bond Yields: Hike, then Spike

Written by: Global Thought Leadership | October 05, 2018

Source: Bloomberg, October 5, 2018.Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

THE BOTTOM LINE

  • Though the FOMC’s Sept 26 rate hike surprised no one, in its wake the U.S. Treasury yield curve saw some unexpected changes, reflecting some new economic expectations.
  • In the weeks before the hike, observers fretted about whether the yield of 10-year Treasuries might rise above 3%, potentially flattening the yield curve between 10 and 30 years and heightening nascent concerns about rate hikes moving the economy toward recession.
  • But that’s not how market reaction has played out. The 10-year yield did break the 3% threshold, reaching1 3.214% on Oct 5.  But instead of flattening, the 10- to 30-year portion (the 10-30 spread) rose, steepening the curve. Indeed the spread between the 30 year and 10 year rates reached about 16.5 basis points (bps) on October 4, well above the July 11 low of 10.14 bps when concerns about recession appeared most intense.
  • That’s because the shift was to mostly due to a rise on tne long end, with the 30-year Treasury yield moving as high as 3.39% on October 4th
  • The 30-year is little affected by Fed policy. Instead it tends to reflect bond market expectations for future growth – and the prospect of growth-related inflation. So however slight the rise in the 30-year and the 10-30 spread might be, the signal is no less clear.  
  • The bottom line: the bond market’s assessment of the likelihood of a recession is that it is further in the future – roughly in line with Fed Chairman Powell’s overall optimistic view of a growing economy with no obvious short-term obstacles. 

 


1 Source: Bloomberg, October 5, 2018, 9:55 AM ET

All data Source: Bloomberg, October 5, 2018 unless otherwise indicated.

 

Definition:

A spread is the difference in yield between two different types of fixed income securities with similar but not identical characteristics, such as maturity, credit quality or currency.

 

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