Mortgage Rates

What the 10-year Treasury fee’s dip beneath 1.5% could also be saying about inflation


A major market signal about inflation declined before the second half of 2021.

When the benchmark 10-year Treasury bond rate climbed quickly to 1.7% in March, Wall Street went on high alert, worried about the potential of the Federal Reserve to overstate its support for the economy during the pandemic while simultaneously unifying Inflation hangovers of this kind had not been seen since the 1970s.

Now, three months later, the 10-year TMUBMUSD10Y yield, 1.476%, fell to 1.479% on Tuesday, down 11.3bps so far in June, but is also resisting the 2% rise many strategists are advocating planned for the end of the year.

What does this mean for inflation expectations? “The 10-year Treasury signals that we will not see sustained inflation above 2%,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, to MarketWatch.

“I think the 10-year period is not so much a reflection of the effects of quantitative easing as it is repeating a scenario that occurred after the 2008 crisis,” said Jones, speaking shortly for the resumption of “quantitative easing” by the Fed at the start of the pandemic with a massive program to buy government bonds and MBB mortgage-backed securities at a rate of $ 120 billion per month, -0.04%.

“The concern is that fiscal stimulus will wane too soon and the economy will not really return to full growth and labor market participation,” said Jones. “Here we are.”

Higher costs are here

That’s not to say that the recent rise in the cost of living to its highest level in more than a decade doesn’t matter.

“I don’t think the market is saying there is no spike in inflation,” said Eric Souza, senior portfolio manager at SVB Asset Management. “Right now there is higher inflation. There is no doubt about it. But will these increases continue? ”

“I think the answer is ‘no’ when you think about where prices have been in the past,” he told MarketWatch, referring to globalization and technological advances that have kept large price hikes in check in the past.

Despite monetary stimulus, the Fed has struggled to keep inflation at its target of 2% over the past 25 years.

The earlier use of Fed incentives to stimulate inflation

Wells Fargo Investment Institute

The above graph superimposes an inflation-adjusted Federal Funds Rate with the development of the annual changes in the Core Consumer Price Index, a measure of inflation.

In addition to inflation, Souza outlined other factors that have also played a role in the treasury market over the past few months, particularly as pension funds and asset allocators grew nervous about the record prices of stocks SPX, + 0.03%,
Decision to take an opportunity to sell shares of DJIA, + 0.03% and buy bonds.

“The 10-year Treasury is the S&P 500 of the bond market,” said Souza. “And now other buyers are coming,” he said, referring to large overseas buyers, including Japan, which recently increased their holdings of government bonds.

“With lower global returns and from a liquidity perspective, it makes sense with these increased returns,” said Souza.

looking ahead

While Fed officials have yet to decide when the central bank could scale back its monthly bond buying program, they have begun to discuss it.

Over the past 15 months, the Fed’s purchases have helped keep the pandemic flood of credit and the cost of borrowing for households and businesses down. But as the economy and labor market recover, the central bank has signaled that interest rates could rise faster than originally expected from the current range of 0% to -0.25%.

Read: Fed’s Rosengren says conditions may exist to reduce bond purchases by the end of the year, with an initial rate hike by the end of 2022

On the flip side, the economic boost from Washington’s worth trillions of dollars of fiscal stimulus, including additional unemployment benefits and flat-rate payments to US households, has already begun to wear off from its peak.

George Cipolloni, a portfolio manager at Penn Mutual Asset Management, said that while global forces are affecting the US treasury market, the 10-year interest rate slump is likely to reflect domestic headwinds as well.

“We were and still are the least dirty shirt in the wash,” said Cipolloni of the treasury market’s position in a world full of negative, low-yielding bonds.

“But I think we will see a cyclical wave of above-average inflation rates in the US,” he said, also pointing to easing price pressures and increasing supply chain disruptions in the early stages of the pandemic’s reopening.

“You saw lumber LB00, -3.65%.
It soared and was recently about 50% below its peak, ”he said.

Even more worryingly, Cipolloni pointed to the massive spike in US debt levels during the pandemic, which could weigh slightly on US GDP growth in the future, even though the second quarter is expected to reach an annualized rate of 8.2%.

And despite the heaps of pandemic stimulation that is lending liquidity to the markets, banks have been parking ever larger sums since April – most recently a record of $ 841 billion – overnight in the Fed’s reverse repo facility and earning 5 basis points instead of using the cash and deposits for lending.

“Unfortunately, I don’t know if there is a good way out of the situation we are in,” said Cipolloni.