Breaking News
0

What’s The Outlook For The U.S. Yield Curve?

By James PicernoBondsJun 28, 2017 09:55AM ET
www.investing.com/analysis/what%E2%80%99s-the-outlook-for-the-us-yield-curve-200197957
What’s The Outlook For The U.S. Yield Curve?
By James Picerno   |  Jun 28, 2017 09:55AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Hawkish comments by European Central Bank (ECB) President Mario Draghi helped lift rates around the world yesterday, including Treasury yields. But it’s premature to conclude that recent flattening of the US yield curve – a bearish signal for the economy — has run its course.

For Europe, however, Draghi’s bullish outlook for the economy, accompanied by a forecast that inflation is still on track to rise, lifted yields on both sides of the Atlantic. “All the signs now point to a strengthening and broadening recovery in the euro area,” the ECB president said on Tuesday. “Deflationary forces have been replaced by reflationary ones.”

Draghi’s comments, which surprised the market, have been widely interpreted as a signal that the ECB will soon begin winding down its monetary stimulus program that’s been in force for several years. Although the pace of any tightening will likely be gradual, the shift in tone may turn out to be a watershed moment for Eurozone policy.

The news helped lift yields in the US on Tuesday, although it’s unclear if rates will continue to rise. The Federal Reserve is trying to engineer exactly that, but the monetary toolkit’s influence so far this year remains weak for longer maturities.

On Monday, before Draghi’s speech, the US 10-year/2-year Treasury spread fell below 80 basis points for the first time since last August, based on daily data via Treasury.gov. The spread ticked up to 83 basis points on Tuesday, but it’s not obvious that the forces that have been compressing the yield curve are no longer in play.

Treasury Yield Spereads 10Yr-2Yr And 10Yr 3mo
Treasury Yield Spereads 10Yr-2Yr And 10Yr 3mo

Even after yesterday’s rise in rates, the yield curve remains considerably flatter compared with last year’s close. Short rates through 3-year maturity have climbed while yields of 5-years-plus have dropped this year.

Treasury Yield Curve Daily Historical Range
Treasury Yield Curve Daily Historical Range

One of the factors that’s been squeezing the curve: expectations that economic growth will be softer than previously assumed. The IMF yesterday, for example, cut its forecasts for growth to 2.1% for 2017 and 2018 (from 2.3% and 2.5%, respectively). A key reason for the downsized outlook is rising uncertainty about the viability of the Trump administration’s economic policies. In other words, confidence is fading that the White House will be successful in rolling out a pro-growth legislative agenda.

The near-term outlook remains positive, although recent estimates of US GDP growth have been sliding lately. The Atlanta Fed’s GDPNow model, for instance, is currently projecting second-quarter growth at 2.9% (as of June 26). That’s an encouraging rebound after Q1’s sluggish 1.2% rise, but only a month ago the bank’s model was forecasting a 4.0% surge in Q2.

Evolution Of Atlanta Fed GDP Now Real
Evolution Of Atlanta Fed GDP Now Real

The Treasury market seems to be pricing in a softer outlook for US economy, based on the flattening of the yield curve. Although the Fed’s official policy outlook is to continue raising rates, “the policy consensus among FOMC members seems to be eroding,” notes a report published yesterday by Roubini Global Economics.

Recent softer inflation has led some Fed policy makers to suggest delaying rate hikes if inflation doesn’t pick up. More recently, Dallas Fed President Robert Kaplan raised another argument for possible delay. He thinks low long-end borrowing rates may indicate a coming slowdown. New York Fed President Dudley disagrees. The FOMC is more likely to stick to its policy path when there is general agreement on the economic outlook. Erosion of the earlier consensus means the outlook for a fairly steady, predictable rise in rates is also eroding.

The consensus for more rate hikes will continue to erode if the 10-year/2-year spread falls below the previous low of 76 basis points from last August – slightly below the current 83-basis-point spread.

Slow-to-modest economic growth will probably prevail for the near term. The wild card is whether the Fed continues to raise interest rates without a commensurate improvement in economic growth. The case for faster output isn’t dead, but the Treasury market has turned skeptical in recent months, despite the efforts of the central bank to argue otherwise.

But hope springs eternal and so the crowd will focus on whether yesterday’s rise in yields – the benchmark 10-year Treasury rate in particular – is sustainable. One reason to wonder: the technical profile for the 10-year yield seems to be rolling over, based on a set of exponential moving averages (EMA). The 10-year rate’s 50-day EMA recently dipped below the 100-day EMA for the first time this year, signaling further weakness ahead.

10-Year Treasury Yield
10-Year Treasury Yield

Meanwhile, the equivalent set of EMAs for the 2-year yield are pointing to higher rates, thanks to Fed policy, which is considerably more potent for the shorter end of the curve.

2-Year Treasury Yield Exponential Moving Averages
2-Year Treasury Yield Exponential Moving Averages

In sum, the forces of momentum appear set to flatten the yield curve further. The antidote, of course, is a run of surprisingly strong economic data. For the moment, however, the bond market is skeptical.

What’s The Outlook For The U.S. Yield Curve?
 
What’s The Outlook For The U.S. Yield Curve?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email