U.S. Treasuries: More than Meets the Eye

Mid Week Bond Update

U.S. Treasuries: More than Meets the Eye

For 10-year Treasuries, a glance at previous cycles offers clues about what might await


The recently-crossed 3% threshold for 10-year Treasuries may have both symbolic and technical significance, but a glance at previous cycles offers additional insight about what that yield might mean for investors now. 

In previous tightening cycles, the 10-year tended to match up with the Fed’s target rates at their peak levels – though not always, and not always ahead of the Fed.  But as a rough guide to where the Fed might head, it’s worth consideration.

Why is that so? The 10-year is often viewed as a solid indicator of  market expectations of future inflation rates.  So watching the 10-year would be a pretty good way to assess the markets’ minute-by-minute vote on the Fed’s effectiveness in managing expectations.

The 3 percent rate is roughly consistent with the Fed’s projections about where rates could end up at the end of this tightening cycle. So far, markets seem to agree that the Fed’s objectives look to be met.  Time will tell how well those expectations will continue.

 

Source: Bloomberg, May 2, 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.

 

On the Rise: European Short-term Yields

The landscape for euro-area government bonds is smaller and more complex than its U.S. counterpart.  But yield curves react similarly to economic realities. That’s one reason the yield curve for AAA-rated government bonds has been flattening somewhat since the beginning of 2018The impending end of the European Central Bank’s ultra-easy monetary policy appears to feeding worries about the  impact on future growth, which is showing up especially on the  are the shorter parts of the curve.  With the Bank of England’s Mark Carney hinting that the UK’s impending hike may be off the table, thoughts are turning to ECB President Mario Draghi’s next move.  In the most recent monthly ECB press conference, he sounded unwavering.  But economic realities could change between now and the end of the year.

 

Source: Bloomberg, May 2, 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.

 

On the Rise: Fixed Income Inflows, with a Twist

As the realities of rate rises finally sink in, inflows into fixed income funds and ETFs remains positive and may in fact be picking up. But those inflows have tilted unmistakably toward the shorter end of the curve.

That makes sense from at least two perspectives.  First, the shorter maturities give an opportunity for investors to benefit from rising rates as shorter-term focused portfolios are effectively forced to roll into higher-yielding paper frequently, making investors beneficiaries of the shifting rate environment.

Second, valuations on the equity side of the equation, though improving as earnings continue to move from strength to strength, could be viewed by investors as neutral, making bonds relatively appealing.

 

Source: Bloomberg, May 2, 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.

On the Slide: The Three-Hike Crew

The strength of the current U.S. earnings season, added to the uptick in consumer prices, seem to be tilting the Fed Funds futures market toward assuming that 2018 will see a total of four hikes instead of the three that were expected by many.

Of course, these expectations shift minute by minute.  But the trend since the beginning of the year appears clear.  That is, unless something changes between now and December 31.

 

Source: Bloomberg, May 2, 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.

 


All data Source: Bloomberg, as of May 2 2018.

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U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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