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. Another reason U.S. interest rates are lower is that the more than $12 trillion of bonds globally are at negative yields. A number of investment banks adjusted their year-end forecasts for Treasury rates downward. Importantly, the Federal Reserve Board more formally changed its posture over future Fed Funds rates; the release of the latest version of the “dot plots” showed a decidedly dovish tilt. The benchmark U.S. 10-year Treasury yield closed the month at a 1.99% yield, a far cry from the 3.13% yield of last November. The 3-month to 10-year yield curve spread, regarded by many economists as a harbinger of a future recession, shifted to negative territory. The 2- to 10-year spread did steepen, however, in light of potential Federal Reserve adjustments. Meanwhile, the Fed Funds futures market moved progressively toward a view of more and deeper rate cuts, pricing in some 100 basis points (bps) of cuts.
Corporate and other credit-related markets bounced around a bit, initially rallying, then selling off on bad economic news, and finally responding positively to the Fed’s outlook and lower rates. The option adjusted spread of investment grade corporates, as measured by the Bloomberg Barclay’s Index, ended the quarter 4 bps tighter. The equity markets, which have generally adopted a more risk-on view, rallied strongly in June as well.