Chart: The U.S. Bond Market Is a Tug of War
The bond market is confused, with two prevailing viewpoints that are pulling it in different directions. The chart below illustrates this.
From the buyer’s perspective:
There’s no inflationary pressure. Wages are rising, but just above the inflation rate. Quantitative easing helped asset prices, but did nothing for prices of goods. QE is being reversed anyway and Fed has already raised rates.
There’s no U.S. recession, but the economy is decelerating. We can see this from things like weak December retail sales, and possible upticks coming in the unemployment rate.
With these indicators in mind, the Fed is on hold, while the yield curve is flat.
From the seller’s perspective:
Market participants know all of the above reasons as to why the bond yield should go lower, and yields already have gone lower, from 3.24 percent on Nov. 8, 2018 on the 10-year Treasury to 2.66 percent on Valentine’s Day 2019.
But are the buyers forgetting about supply and demand?
The U.S. budget deficit is $1 trillion a year and climbing. The U.S. Treasury has been issuing a lot of short-term Treasury bills, but it will issue more long-maturity notes and bonds, too. Central banks are not buying as many U.S. Treasuries as they once did (including China).
The U.S. Fed is letting its Treasury security portfolio shrink through run-offs — not sales, but not replacing either, so the Fed is no longer a buyer.
Any good news or positive surprises on the trade war have the ability to lift equities and possibly hit bonds. All of these are factors that should lead us to follow the news, and the chart above is one of the best reflections of that news in financial markets.
Meanwhile, the bond market is a tug of war.