What a difference a couple of months make.
The year kicked off with investors again predicting this was the year Treasury bond yields would finally, after so many false starts, dart higher as the Federal Reserve raised official borrowing costs.
Instead, the bond market has parted ways with equities big league, with lower yields signalling the sort of concern about the country’s economic prospects and companies profit margins that is starkly absent from a giddy, record-loving stock market.
“Not long ago we were often asked why our 2.5% end-March 2017 forecast for 10-year US Treasury yields was so low,” write Goldman Sachs strategists Francesco Garzarelli and Rohan Khanna in a research note. “Now, the most recurrent questions are how much further can bond yields fall?” Also: What will make them move higher?
Treasury bonds are considered a safe haven investment and their yields move opposite to their price. Despite slightly higher yields following the French election, 10-year benchmark rates stood around 2.30%, below a post-election peak near 2.60%.
Stocks, in contrast, have defied gravity, chasing frequent new record highs despite concerns about firms’ profitability, a weak investment backdrop and the prospect of additional interest rate increases from the Federal Reserve.
In order to highlight the bearish trend in the US government bond market, the Goldman analysts contrast its moves with those of its comparable foreign counterparts.
“In the big picture, US Treasuries have represented a bearish force for global fixed income since last June, and particularly since the election of President Trump,” the Goldman strategists write. “More clouds have gathered over the size and the timing of the Trump Administration’s fiscal expansion, and the news on the inflation front has been more mixed of late.”
As for the matter of when yields might actually turn higher, Garzarelli and Khanna are telling clients the pace of Fed tightening will be key: “The level of US yields is ultimately set by the Fed, the only major central bank that we expect to tighten policy this year and next.”
For Wall Street traders, prepping for bond yields to rise has been like waiting for Godot. But they will keep doing it.
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