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.
Markets were again dominated by technical factors. The Federal Reserve liquidity/quantitative easing programs and Congressional fiscal stimulus programs gave investors confidence that the economy was being, in a sense, underwritten by the government. With the intervention, the markets were able to look past economic data that would ordinarily have been interpreted as an economy in severe distress. The result was significant outperformance of many risk sectors relative to government bonds.
Fed officials continued to use their “bully pulpit” to calm investors, and discussion about yield curve control measures has picked up steam among bond buyers.
TIPS break-evens remained steady, with the 10-year closing the month at 114 bps. There is considerable debate over the longer-term outlook on inflation, given the unique nature of the current crisis. Likewise, the dollar was little changed month over month.
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