U.S. Rates: Sleeper Steepening

Mid Week Bond Update

U.S. Rates: Sleeper Steepening

While some market observers worry about an overly hawkish Fed provoking recession, the U.S. Treasury yield curve appears to be sending a somewhat different message.

Earlier in the year, a flattening curve sparked speculation that it might actually invert – one of the most reliable market signals that recession might be 12 to 18 months away.

U.S. Treasuries: The Longer the Steeper

Source: Bloomberg, November 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.

But the inversion hasn’t materialized. Instead, the trend reversed slightly, with yields for the 30-year rising with little fanfare in recent weeks – perhaps due to the rosy economic scenario painted by the Federal Reserve in making the most recent rate hike. Compounding that has been the fall in inflation expectations in recent weeks; one well-followed 5-year breakeven inflation rate reached as low as 1.87% on November 1, 2018.

Not surprisingly, the debate has shifted away from the curve, replaced by worries about the Fed’s perceived willingness to talk out loud about hiking rates from “accommodative” to “restrictive” over the next year.

On the Rise: Indonesia’s bonds and currencies

Add Indonesia to the list of emerging-market (EM) economies pulling back from the brink.  The Indonesian rupiah is one of the six EM currencies to have risen since the end of Q2, up just under 3% against the U.S. dollar since its low of 15,238 on October 9th; rising to 14,804 on November 6. Local-currency bonds have done well, with 10-year yields falling from their October 15th high of 8.878% down to 8.14% as of November 6.

The twin surges are due to rekindled interest on the part of foreign (i.e., non-Indonesian) funds, attracted by the latest moderate inflation rate of about 3%, along with economic growth of more than 5% for a seventh month running, as announced on November 5.

On the Slide: European business sentiment

Expectations about the Eurozone economy six months from now continue to be negative, according to Sentix surveys, remaining below the zero level[1] since March 2018. The most recent figure, for November, is -9.75. That’s a challenging finding, but reflects the magnitude of three issues facing Europe:  the potential for an Italian debt crisis; the European Central Bank (ECB) sticking to its schedule of winding down its ultra-accommodative bond-buying program; and the unknowns surrounding the implementation of Brexit.

However the Sentix Euro Aggregate Overall Index, a more general read of overall conditions, remains in positive territory at 8.84, suggesting that the negativity toward the future isn’t felt about present conditions. That assessment may also explain the behavior of the German 10-year Bund, whose yield has remained solidly above zero since late 2017. One interpretation of that stability is that it could reflect a lack of concern over the ongoing economic problems in Italy.  But a more negative interpretation may also hold – that the Bund, like U.S. Treasuries, is now trading on the basis of its perceived status as a safe haven.

All data Source: Bloomberg, unless otherwise indicacted.

[1] The Sentix indexes are diffusion indexes, with readings above zero indicating positive sentiment, and values below zero indicating negative sentiment.


Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.




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