Insights

What started out as a rather staid and uneventful first quarter of 2019 for the bond market quickly turned into a major rally in credit followed by a big move (down in yield) for Treasuries. The Federal Reserve Board completed its about face, with or without any egg on that face, depending on your point of view, and conceded that the global slowdown and lack of inflation pressure diminished the need for additional rate hikes. 

February was marked by a “risk on” environment, with stocks rallying, corporate spreads tightening, and oil prices rising--despite weak economic growth globally. Although the news was better in the U.S., data were not particularly strong until the last day of the month. Fourth quarter GDP posted a significant gain (2.6%) including an unexpected jump in business investment.  

The 10-year Treasury rate hovered in a stable range for most of January, but was book-ended by significant rallies at the beginning and end of the month. Weak data out of China and a lousy ISM Manufacturing report got the ball rolling on January 2. The rally ended quickly, as the employment report on the 4th helped positively change market sentiment. 

2018 brought a host of challenges as geopolitical events, policy upheavals, and changing economic conditions buffeted the markets. Volatility, and lots of it, was pervasive, with several prominent themes rotating through the headlines and contributing to the unsettled markets.

After an uptick to 3.23% early in the month, the 10-year U.S. Treasury rate fell significantly and closed the period at 2.98%. The yield curve flattened; particularly noticeable was the 2- to 5-year segment which is now nearly flat. Ten-year Treasury Inflation Protected Securities breakeven spreads fell to 196 basis points (bps) from 206 the month prior, as core PCE fell below 2.0%.

Equity markets dominated the news in October, with a broad-based sell-off and high volatility through most of the month, despite generally positive earnings reports. Treasury bond prices broke the pattern of responding positively to poor equity performance. Instead, yields rose significantly early in the month. 

As the summer months got under way, it seemed as though the fixed income markets would enjoy a peaceful respite from the tumultuous first half of 2018. Alas, it was not to be. The bond market found itself buffeted by economic data as well as global/political events.

Against a backdrop of record setting equity markets, sinking emerging market currencies, potential trade wars (and resolutions thereof), strong corporate profits, and solid domestic economic growth, bond markets were fairly sanguine during the month of August. The 10-year U.S. Treasury note closed the month at a yield of 2.84%, about 12 basis points (bps) lower than where it began. The 2-year note fell 5 bps, as the yield curve maintained its flattening trend.

July proved to be an uneventful month for the U.S. Treasury market, with one exception: rates hardly budged until July 20 when the 10-year note yield rose by 11 basis points (bps) over the course of two days. At month-end, the 10-year yield was at 2.96%, up 10 bps from June’s close. The yield curve flattened modestly, with the 2- to 10-year slope ending the month at 31 bps.

Welcome to the Experiment Economy! The first experiment started some 10 years ago, as the Federal Reserve Board engaged in unprecedented quantitative easing in an effort to prevent a financial system meltdown. Universally considered a success by analysts, now it is time to for the Fed to engage in the second half of its experiment: reversing course.