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.
Overseas, the overall economic tone continued to be relatively bearish, despite a bit of a pick-up in China. Europe is especially problematic with negative yields extending beyond sovereigns to some corporate credits and Germany also mired in a slowdown. Domestically, there was a strong GDP report late in the month, but analysts quickly discerned weaknesses in some important components. Other data releases showed mixed results: payrolls and durable goods data beat market expectations, but personal income and industrial production were lower than expected. The labor market remains strong, with the unemployment rate at only 3.6%.
Inflation remains below the Federal Reserve’s target. Fed directors have emphasized the desirability of having inflation at or above 2%. The market has responded by pricing in Fed rate cuts over the next 12 months. Ten-year TIPS breakevens have hovered close to 190 bps.