Market Review

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).

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Despite already low levels, U.S Treasury yields fell across the yield curve during July. Long rates fell the most, resulting in a flattening of the curve. TIPS break-even levels rose, as investors judged valuations as attractive given future inflation expectations. 
 
 
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Let’s flash back to March 31 of this year. The planet is in the midst of a highly infectious and dangerous pandemic. Much of the world essentially closes, with the potential for Great Depression era economic statistics to be matched if not surpassed. Yet central banks have sprung into action, with the U.S. Federal Reserve taking the lead in providing liquidity and support to the markets. 

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As the public health and economic fallout from Covid-19 continued, U.S. Treasury yields traded in a reasonably tight range during May. Ten-year yields stayed within a 12-basis point (bp) band, while 30-year yields kept to a 20 bp range. Twenty-year notes were issued by the federal government for the first time in many years, and the market gave the new paper a warm reception.  Ultimately, the 2- to 30-year yield curve slope steepened by 16 bps, as the short-end of the curve remained firmly anchored.

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Federal Reserve Chair Powell indicated that they would use whatever tools available to support the economy during the COVID-19 pandemic. Concurrently, Congress and the administration continued to add to their dramatic fiscal response.

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As of this writing, there have been no new fiscal programs enacted since the Phase 3 CARES Act on March 27. Congress spent a portion of last week debating an expansion of the CARES Act. The Senate finished the week at an impasse, attempting to add $250 billion to the Paycheck Protection Program (PPP). Democrats sought more money for hospitals and state and local governments in exchange for passing a Republican proposal for more small-business loan funding.

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