Market Review

After an uptick to 3.23% early in the month, the 10-year U.S. Treasury rate fell significantly and closed the period at 2.98%. The yield curve flattened; particularly noticeable was the 2- to 5-year segment which is now nearly flat. Ten-year Treasury Inflation Protected Securities breakeven spreads fell to 196 basis points (bps) from 206 the month prior, as core PCE fell below 2.0%.

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Equity markets dominated the news in October, with a broad-based sell-off and high volatility through most of the month, despite generally positive earnings reports. Treasury bond prices broke the pattern of responding positively to poor equity performance. Instead, yields rose significantly early in the month. 

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As the summer months got under way, it seemed as though the fixed income markets would enjoy a peaceful respite from the tumultuous first half of 2018. Alas, it was not to be. The bond market found itself buffeted by economic data as well as global/political events.

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Against a backdrop of record setting equity markets, sinking emerging market currencies, potential trade wars (and resolutions thereof), strong corporate profits, and solid domestic economic growth, bond markets were fairly sanguine during the month of August. The 10-year U.S. Treasury note closed the month at a yield of 2.84%, about 12 basis points (bps) lower than where it began. The 2-year note fell 5 bps, as the yield curve maintained its flattening trend.

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July proved to be an uneventful month for the U.S. Treasury market, with one exception: rates hardly budged until July 20 when the 10-year note yield rose by 11 basis points (bps) over the course of two days. At month-end, the 10-year yield was at 2.96%, up 10 bps from June’s close. The yield curve flattened modestly, with the 2- to 10-year slope ending the month at 31 bps.

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Welcome to the Experiment Economy! The first experiment started some 10 years ago, as the Federal Reserve Board engaged in unprecedented quantitative easing in an effort to prevent a financial system meltdown. Universally considered a success by analysts, now it is time to for the Fed to engage in the second half of its experiment: reversing course. 

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