Insights

The tide turned on interest rates in the fourth quarter of 2019. The 10-year U.S. Treasury note yield reached a low for the year in September, hitting 1.46%. In October, the Federal Reserve cut rates for the final time in 2019. The market responded by taking a more measured view over future rate moves, with many if not most participants believing that the Fed will be on hold in 2020. 

Rates rose as the month began, only to move back as the month progressed. Ultimately, the yield curve had a modest “bearish flattening” for the month with 2-year Treasury yields rising 9 basis points (bps), while 30-year yields increased by only 2 bps. The 2- to 10-year yield spread was virtually unchanged.

October featured a “more of the same” theme with respect to domestic economic data and news. The Federal Reserve cut the Fed Funds rate (as anticipated), the consumer continued to drive the economy, corporate earnings came in higher than expected but continue to decline, wage growth was marginal, and inflation benign. GDP growth for the quarter, at an annualized rate of 1.9%, came in higher than Wall Street anticipated. The trade war pendulum swung towards resolution, with a preliminary deal now expected to be signed in November. BREXIT resolution appeared to be on-again, off-again. 

It might be our imagination, but we seem to recall summers when, as the song goes, living was easy. We fondly remember summer as a time for digging our toes in the sand at the beach, sailing a sunfish on a lake, or maybe enjoying a round of golf at the local course. Not so in 2019, at least as far as the bond markets were concerned. Interest rates took a roller coaster ride. Global economic weakness, negative rates overseas, an inverted yield curve at home, trade wars, Brexit, a shifting Federal Reserve, oil refinery attacks in Saudi Arabia, “repo-madness,” and, to top it off, impeachment inquiries, all made this summer very eventful and made us long for apple picking season come fall.

Treasuries had their biggest monthly gain since the depths of the 2008 crisis.  The 30-year yield fell 56 basis points (bps) to a record low 1.97%, and shorter maturity yields also fell to multi-year lows. The 10-year rate ended the month lower by 50 bps, to 1.50%, and 2-year yield fell 36 bps, to 1.53%, leaving the slope between 2s and 10s, one of the most watched signals of an impending recession, almost perfectly flat.

History was made on August 14, 2019, with the recording of the lowest closing yield (2.02%), on the 30-year U.S. Treasury since regular auctions began in 1977. The previous lowest closing yield (2.099%) was recorded on July 8, 2016.

Concerns over weak global growth, the negative impact of trade disputes, very low and negative interest rates overseas, and low inflation are driving interest rate markets.Rate movements in July were generally subdued. The 10-year U.S. Treasury yield did a round trip, rising from 2% to 2.14% before closing the month back at a 2.00%. However, the 2-year yield rose by 14 basis points (bps), resulting in a flattening of the slope of the (2-to-10 year) yield curve.

The Treasury market rally continued through the second quarter, fueled by fears of a global economic slowdown (particularly in manufacturing), softer domestic economic data, dovish responses from central banks, and perhaps most of all, continued uncertainty over the outcomes of U.S. trade disputes. 

Rates went on a straight shot downward in May, with the 10-year Treasury note yield falling nearly 40 basis points (bps).  The yield curve, measured from 3 months to 10 years, inverted and stands at -15 bps. Ten- to 30-year spreads closed the month nearly unchanged at about 45 bps.

April was a low volatility month for interest rates. The 10-year Treasury yield began to rise very late in March, peaking at 2.60% on April 17th. Rates changed course and closed the month at a 2.50%. The “mini-inversion” of the yield curve continued, with the 6-month to 3-year spread now at -15 basis points (bps). The much followed 2- to 10-year ended the month 9 bps steeper.