Treasury yields continue slide with traders wary of ‘curve inversion’

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December 4, 2018 12:43pm ETF BASIC NEWS

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From Thomas FranckU.S. government debt yields sank Tuesday as fixed-income investors continued to doubt expectations of burgeoning inflation and sustained economic activity amid more dovish commentary from the Federal Reserve.


 

On Monday, a portion of the so-called yield curve inverted, a phenomenon characterized by short-term rates that exceed long-term rates. As of Tuesday morning, the yield on the benchmark 2-year Treasury note hovered at 2.823 percent, above the yield on the 5-year note at 2.812 percent.

Short-term yields, impacted by changes in Fed policy, have been anchored in place in recent months as Chair Jerome Powell led his colleagues in three increases to the overnight lending rate. In contrast, inflation and economic expectations dictate the movement of long-term rates; investors estimate how much they should be compensated beyond inflation for holding government debt over several years.

The difference between the 5-year Treasury inflation-protected securities, or TIPS, and the corresponding Treasurys hit 1.72 percentage points last Tuesday. That spread is a practical look at the market’s projection of where inflation is heading, and is down from highs over 2 percent in October. The closely followed spread between the 2-year Treasury note yield and the 10-year Treasury note yield remains positive.

The yield on the benchmark 10-year Treasury note was lower at 2.942 percent at around 11:28 a.m. ET, while the benchmark on the 30-year Treasury bond was also lower, trading at 3.202 percent. Bond yields move inversely to prices.

With bond traders expecting returns in the next two years to exceed those in the next five, inversions typically portend economic recession. Though there is a high correlation between a yield curve with a negative slop and economic recession, the time between inversion and GDP contraction often varies and is difficult to predict.

While there was much disagreement between investors on when to expect a recession, traders voiced unified concern that the Fed’s inflation predictions have been too optimistic.

“I think ever since Jay Powell’s speech we have assumed that the Fed is nearing a pause,” said Kevin Giddis, head of fixed income capital markets at Raymond James. “I don’t know if that’s true but the benefits are that 10-year rates have likely peaked around 3.25 percent a few weeks ago, and that we’ll probably finish the year sub 3 percent.”

“The Fed is getting on board with where the bond market was all along on inflation,” he added.

Symbol
Yield
Change
%Change
US 3-MO 2.42
0.015 0%
US 1-YR 2.698
-0.009 0%
US 2-YR 2.813
-0.02 0%
US 5-YR 2.795
-0.044 0%
US 10-YR 2.919
-0.072 0%
US 30-YR 3.174
-0.104 0%

Powell said last week that the benchmark interest rate was “just below” the neutral level — meaning one that would neither speed up nor slow down economic growth. That remark appeared to backtrack from a previous statement by Powell in which he said rates were still a “long way” from the targeted neutral rate.

Giddis added that with all eyes on inflation, the Labor Department’s report on the employment situation on Friday will be key for Fed officials. The government’s November jobs numbers will also include an update on average hourly earnings, which can be used to see how fast wages are rising across the U.S. economy.

If wages are rising at a quick pace, Fed members may be more apt to continue to hike interest rates to try to stay ahead of inflation. The Federal Open Market Committee, which sets the federal funds rate, will gather for a two-day meeting on December 18, where the central bank is strongly expected to hike interest rates.

— CNBC’s Sam Meredith and Ryan Browne contributed to this article.


The iShares 7-10 Year Treasury Bond ETF (IEF) was trading at $102.19 per share on Tuesday afternoon, up $0.40 (+0.39%). Year-to-date, IEF has declined -2.54%, versus a 3.11% rise in the benchmark S&P 500 index during the same period.

IEF currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #15 of 28 ETFs in the Government Bonds ETFs category.


This article is brought to you courtesy of CNBC.


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