January was characterized by a significant rally in the U.S. Treasury market. Ten-year yields fell by 41 basis points (bps) and the 2-year yield declined 24 bps. The yield curve flattened with the 2- to 10-year spread falling to 17 bps and the very short-end of the curve actually inverted. The 30-year bond yield declined substantially although failing to keep pace with the 10-year, leading to a very modest steepening of the long end of the curve.
Although bond prices began to rise right as the new year began, the bulk of performance was driven by the coronavirus scare and its potential impact on global growth. Geopolitical news was front and center this month, with a Phase 1 China trade deal completed, a signed revised North American trade pact, a Brexit vote, and a U.S. attack on Iranian interests in Iraq.
On the economic data front, domestic news releases were more positive than negative. Manufacturing data continues to come in on the weaker side, but employment and consumer data continue to be favorable. Inflation remains benign. Globally, data generally showed some improvement in economic conditions while oil prices plunged because of the coronavirus. The Fed held short rates steady.
The spread of the coronavirus and its economic impact is the “wild-card” regarding short-run bond market performance.
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