Insights

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.
 

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.