U.S. Treasury yields: Throwing curves

Written by: Global Thought Leadership | June 23, 2017
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Source: Bloomberg, as of 6/21/17.  Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

BOTTOM LINE


  • What's behind the surprising shift in yields of U.S. Treasuries since the beginning of this year? Is it the result of benign economic progress, or a sign of something more ominous?
  • The U.S. Treasury (UST) yield curve has flattened noticeably this year—along with many sovereign yield curves worldwide.
  • While the rise in short-term rates is no surprise given the Fed's rate hikes over the past year, longer maturities are a different matter.
  • The downward move in the long end of the yield curve was a surprise to some market watchers, who expected improving global growth to lift inflation, which would in turn put upward pressure on longer-term bond yields.
  • Instead, inflation has been missing in action in much of the world economy.
  • That means investors searching for even a modest yield pickup in government-issued securities have had to buy longer maturities than they might otherwise have preferred.
  • Many observers believe the combination of low inflation and higher demand for long-dated bonds are keeping downward pressure on longer-term bond yields, leading to a flatter yield curve.
  • But there's another possibility: the market could be anticipating a slowdown in growth in the U.S., as well as a potential pause in the Federal Reserve’s well-telegraphed path to higher interest rates.
  • Certainly, a flattening yield curve – at least in the past – has typically been a harbinger of slower growth; recent soft U.S. economic reports lend some support to the possibility.
  • But it’s still too early know for sure. And the curve would probably need to flatten a lot more before it becomes a clear signal of a slowdown.
  • When you consider a country like Germany, whose yield curve has also flattened this year despite its strengthening  economy, it's clear that other factors could very well generate similar shifts in sovereign-market interest rates.
  • And only time will tell if markets are expecting continued growth—albeit at a very moderate pace—without any meaningful inflation. Or if more ominous news is around the next corner.

 

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