Treasury yields declined modestly during the month and the yield curve flattened, a continuation of trends seen for most of 2017. Ten-year yields initially rose to 2.41% early in the month, before falling to 2.23% at monthend. The 2- to 30- yield curve spread has declined by 30 basis points since the beginning of the year.
The bond market has been re-thinking its allegiance to the “reflation trade.” Inflation data—both in the U.S. and Europe—trended lower and has been more subdued than anticipated by the market. Domestic growth numbers have generally been weaker than expected, and the continuing strength of the consumer is coming under scrutiny. Further, the ability of the Trump administration to push through an aggressive tax cut/fiscal policy agenda has been hampered by party in-fighting and election controversy.
Bond market participants are again closely focused on the Federal Reserve, particularly with respect to the Fed’s developing plan to shrink its $4+ trillion balance sheet. Few details have been decided or released, and estimates of the impact on the bond market vary widely.