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. Moreover, the Fed announced that the end of “quantitative tightening” was at hand. The bond market, not to be outdone, actually priced in Fed Funds rate cuts by the end of 2019.
That left us once again in a sort of “Goldilocks” market environment for bonds. Expectations for GDP growth are in the mid 2% range, PCE core inflation has remained below 2%, and financial conditions have eased generally. With Fed tightening out of the picture, risky assets rallied, and rallied in a big way. The S&P 500 was up 13% for the quarter, oil rose 29%, high yield bonds returned 7%, and even intermediate-term corporate bonds posted a nearly 4% return. All in all, a massive turnaround from the fourth quarter of 2018, when many risk assets were pilloried.
But the beauty of the Goldilocks market is that Treasury bonds prosper as well. The Fed’s announcement in mid-March clarified the outlook for government bond investors and led to the late March rally and a partial inversion of the yield curve. Five-year Treasury yields fell to 2.15%, while money market paper held in the 2.40% range. In the meantime, the closely watched 2- to 10-year yield curve slope (as well as 2- to 30-years) remains positively sloped.