The benchmark 10-year Treasury yield eased yesterday (June 15) to 1.60%–the lowest since late 2012, based on daily data via Treasury.gov. The downtick follows yesterday’s decision by the Federal Reserve to delay another rate hike. Why? The economy’s too weak to sustain another round of policy tightening, at least for the moment. As a result, the benchmark Treasury yield is closing in on its all-time low in July 2012 of just above 1.40%. Will we see a new record low at some point in the near future? No one knows, of course, but it’s premature to discount the possibility. In other words, the multi-decade bull market for bonds isn’t quite dead after all.
Some analysts say that the 10-year yield’s decline this year is as much about foreign buying as it is a reflection of mixed US economic data. That’s a reasonable view when you consider that the German 10-year yield is currently negative, albeit by the thinnest of margins. Nonetheless, from Europe’s perspective, a 1.60% Treasury yield looks extremely tempting.
“It’s amazing. I never thought I’d see the day where 10-year German rates would go negative,” Anthony Cronin, a Treasury bond trader at Societe Generale SA, tells The Wall Street Journal. “It is difficult to say what is next but it seems safe to expect money to continue to flow into U.S. Treasurys.”
Note that the 2-year yield, which is considered the most-sensitive maturity for rate expectations, has been firmer in recent history. But after yesterday’s trading session, the short end of the curve appears to be succumbing to gravity as well. The 2-year yield dipped below 0.70% yesterday for the first time since February.
As for the dark art of looking ahead, profiling the 10-year Treasury yield with a set of exponential moving averages (EMAs) implies that even lower rates are coming. As the next chart shows, the downward trend is intact with the 50-day EMA of the 10-year yield below the 100-day EMA, which is below the 200-day EMA. In fact, that bearish setup has been in force months and it shows no sign of reversing any time soon.
The 2-year’s EMAs, by contrast, are mixed, although recent history suggests that a bearish signal may be brewing. The 2-year’s 50-day EMA again ticked below its 100-day EMA this week. If and when those EMAs fall below the 200-day EMA, which is a possibility in the weeks ahead, the trend for the 2-year yield will look convincingly bearish as opposed to mixed.
Granted, Fed Chair Yellen didn’t rule out a rate hike in July—it’s “not impossible,” she said at yesterday’s press conference. But the Treasury market has its doubts. Perhaps those doubts are driven by investors outside the US in a desire to capture a higher relative yield, regardless of economic conditions in America. Whatever the reason, it’s not inconceivable that the 10-year yield could dip to a new all-time low before this year is out.
All bets are off, of course, if the incoming economic numbers deliver an upside surprise. Recent history, however, suggests that the macro trend will remain mixed.
As Neil Irwin writes in The New York Times, “If markets could talk, they would be saying: ‘We don’t think you’ll raise interest rates as much as you say, and if you do it anyway you’ll probably regret it.’”