Give Peace a Chance
Prior Week Summary
Fixed income markets spent a good portion of last week pondering the implications of a 3% 10-year Treasury note in the context of a flattening yield curve and calming geopolitical risks. Yields on the benchmark note rose above 3% mid-week, before reversing to close the week at 2.96%. By any reasonable standard, the difference between a 2.96% and a 3.03% yield on the global fixed income benchmark for borrowing costs is relatively minor. But the breach of the 3% level is seen by some analysts as the beginning of a paradigm shift in the “long-term bond bull market”. Since 2011, the market has approached the 3% boundary twice, with each time leading to a strong reversal in yields lower. In the case of the early 2014 reversal, yields fell nearly 170 basis points before spiking after the 2016 presidential election.
Whether this time is any different remains to be seen. But as with any other market narrative, understanding the potential catalysts and implications of a rise in long-term borrowing costs are worth paying some attention to. Debt levels have risen to historically elevated levels on both the public and private sector balance sheets following the credit crisis, while GDP growth has underwhelmed. The market will likely pay particularly close attention to the Treasury’s quarterly funding announcement this week to see how large upcoming bond auctions will need to grow to fund our increasing “twin” deficits.
The Look Forward
In addition to the Treasury refunding announcement, the market will look forward to the Fed decision on Wednesday and the non-farm payrolls report on Friday for updated clues on the state of the economy. It is expected to be a very active week for Fed speakers as well. Good luck.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
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