Rates went on a straight shot downward in May, with the 10-year Treasury note yield falling nearly 40 basis points (bps). The yield curve, measured from 3 months to 10 years, inverted and stands at -15 bps. Ten- to 30-year spreads closed the month nearly unchanged at about 45 bps.
The “risk-off” environment that has been so pervasive has been largely a function of fears of an expanded trade war with China, weak global growth prospects, and inflation running well below the Federal Reserve’s target. An increasing number of sovereign bonds (particularly in Europe) with negative yields also results in a strong bid for U.S. dollar denominated paper, pushing rates lower.
Domestic economic data has been mixed, with strong employment trends, but a number of indictors such as retail sales, construction spending, and industrial production came in below consensus estimates.
The market’s view has shifted dramatically from early this year, with the focus moving to the Fed and lack of inflation. With the dollar high, inflation low, and the uncertain economic backdrop, markets are pricing in significant Fed Funds rate cuts. TIPS breakevens have returned to near their January 2019 lows.