Short rates moved up modestly, and longer rates rose more significantly during August, producing negative total returns for Treasuries. The 5- to 30-year yield curve slope steepened by 22 basis points (bps).
A weak 30-year bond auction, a Federal Reserve policy shift, and dollar weakness all contributed to the long bond sell-off. The Fed announced a move toward average inflation targeting and noted that labor market strength will not, in and of itself, be taken as an indicator of future inflation. While this should have little impact on markets near-term, it has stimulated debate over the future pace of inflation and put renewed focus on TIPS.
The “risk-on” market view prevailed in August, with equities pushing new highs and credit spreads continuing to contract. The economic news was generally positive, as home sales, housing starts, PMI reports, and July job growth all came in stronger than expected. The expected new stimulus plan from Congress never materialized, but the consensus view is that a bill will be passed in September. Positive news also came on the public health front, in the form of fewer Covid cases in hot spots and advances in vaccine development.
Election rhetoric continues to heat up and with it, market uncertainty, as President Trump has momentum in closing polling gaps in key swing states. Sino-American tensions continue to generate an uneasy backdrop to global stability.