The Bottom Line
- On March 9, for the first time in nearly three years, the 10-year U.S. Treasury yield broke above 2.6%1—a feat many observers felt would mark a sustained shift toward higher rates.
- Yet that breakout was short-lived—with the 10-year yield falling back below 2.4% by March 29th.
- There’s still plenty to support a view for higher rates longer term, including solid economic data, a pickup in inflation expectations, two Fed rate hikes in three months and a growing U.S. budget deficit.
- Yet market reaction over the past two weeks would seem to suggest any shift toward stronger growth and higher rates could be slower and longer.
- Why? Consider that the surge in optimism seen after the November election has not quickly or easily translated into real economic activity.
- Given the real difficulties—both seen and unseen—of turning political proposals into actual policy, expectations were probably a bit high.
- That was made abundantly clear by the failure of the House Republican majority to pass their own healthcare legislation recently. For many, this calls into question whether tax reform and other fiscal stimulus measures will move forward as easily as previously thought.
- Meanwhile, economic growth still appears to be on a positive trajectory—but certainly not taking off like a rocket. Inflation expectations have fallen back below 2.1% after rising to 2.27% in late January.
- So while more normal level of growth and interest rates may still be likely, the timing of its arrival is likely to remain elusive.
- That highlights the continuing wisdom of holding strategies flexible enough to prepare for multiple scenarios rather than committing too heavily to a single outcome.
1 Source for all data is Bloomberg, as of 3/29/17.