It’s nothing new, but the endurance of the trend doesn’t dim the spectacle of the bond market resuming its preference for sending the yield on the benchmark 10-year Treasury Note lower. The decline is all the more striking coming in the wake of the Fed’s latest hike in interest rates on August 9. Since that day, the 10-year’s yield has slipped to roughly 4.25% on Friday from 4.40% when the central bank elevated the Fed funds rate rose by 25-basis-points to 3.50%.
What does it mean when the bond market is intent on taking issue with the Fed’s monetary policy and rendering Greenspan & company something less than influential? The answer: to be determined.Clarity oozes ever so slowly from the market in the dog days of August.
Among the questions one should ask in trying to deconstruct the current “conundrum” is whether the persistence of low long rates in the face of rising short rates reflects a belief in the approach of a slowing economy or, alternatively, the continued rise of excess savings that are flowing into bonds and thereby keeping yields lower than economic fundamentals suggest?
Tackling the economic slowdown theory first, one can look to the recent statistical releases to question the logic of this view that things will get worse before they get better. This morning’s release of the New York Fed manufacturing index is the latest reason for a central banker to see the economic glass as still half full rather than half empty. The August Empire Manufacturing index, a survey of manufacturers in New York state, rose more than expected, and has advanced for three months in a row.
Growth is easily found on a national basis as well. Indeed, the Federal Reserve has no doubt noticed that the nominal year-over-year rise in GDP in the second quarter was 6.1%, or more than a bit higher than the current 3.5% Fed funds rate. Liquidity, one could argue, still has the upper hand, or so these crude metrics convey, which suggests that additional tightening in the money supply is warranted.
That seems to be lending support to the view that buying Treasuries the world over still makes sense despite the various macroeconomic challenges facing America. Indeed, investors near and far bought a $71.2 billion Treasury notes, along with corporate bonds and other securities in June, the government reports today. That’s the highest since February’s $79.6 billion, and is also up sharply from a revised $55.8 billion in May. Foreigners may yet decide that U.S. debt’s allure is fading, but signs of such a shift in market sentiment have yet to arrive in any material way.
Investors are still gobbling up American debt instruments, and that appetite has proven influential of late in overcoming news that the U.S. economy remains robust. But the fixed-income set is showing signs of anxiety nonetheless. And with just 20 basis points or so separating the yield on the two-year and 10-year Treasuries, who can argue against keeping one eye open and another on the sell button?
Still, there’s enough give and take to see any financial future you desire. Depending on the day, or the hour, bulls or bears prevail, with the trend of going nowhere fast winning the day. The demand for Treasuries makes the dollar relatively more attractive, which in turn helps keep the 10-year yield lower than it might otherwise be. But a strong economy implies more Fed rate hikes, which in theory inspires the bond market to run for cover. Back and forth, round and round. Resolution is coming…one day.