| Tuesday, August 29, 2017 | ||||||||
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 8/22/17 | .93 | 1.00 | 1.13 | 1.24 | 1.33 | 1.48 | 1.80 | 2.04 | 2.22 | 2.55 | 2.79 |
| 8/23/17 | .98 | 1.00 | 1.11 | 1.22 | 1.32 | 1.45 | 1.76 | 1.99 | 2.17 | 2.51 | 2.75 |
| 8/24/17 | .98 | 1.02 | 1.11 | 1.23 | 1.33 | 1.47 | 1.78 | 2.01 | 2.19 | 2.53 | 2.77 |
| 8/25/17 | .99 | 1.03 | 1.11 | 1.23 | 1.35 | 1.47 | 1.77 | 2.00 | 2.17 | 2.51 | 2.75 |
| 8/28/17 | .99 | .98 | 1.12 | 1.24 | 1.33 | 1.46 | 1.74 | 1.99 | 2.16 | 2.51 | 2.76 |
Source: U.S. Department of the Treasury, as of 8/28/17
What a Long Strange Ride It's Been
We have become acutely aware about the flattening of the Treasury Yield Curve this year. Looking back, as measured by the yield differential between the 2-year and 10-year benchmarks, the spread is the lowest we have seen since fall of 2007. As you can see from the first chart below, we briefly reached these levels in the summer of 2016, but the major trend since the winter of 2010 is down. This makes it difficult for banks to improve their margins. The post-election Trump reflation trade steepened the curve temporarily, and enthusiasm for bank stocks was evident through last February. Now that the euphoria has passed, banks are underperforming the S & P and the Dow again, despite some easing of regulatory burdens.
The second chart below pictures the entire Treasury Yield Curve, including 1 month to 30 years…. 8/28/07 vs. 8/28/17. Not surprising to see that the yield curve was very flat in 2007. It was actually inverted at times during 2007. An inverted condition normally tells bond investors to extend and get as much call protection as possible. This worked very well in 2007, as you can see from the chart and table. If we invert at these historically low levels will it be time to extend again? Would you be comfortable extending if the 2-year gets to 2.50%, accompanied by a 2.00% 10-year yield? We don’t think so.
There have been a lot of difficult twists and turns for portfolio managers to navigate over the past 10-years. George W. Bush, Barack Obama & Donald Trump, Ben Bernanke and Janet Yellen. Lehman Brothers failing, Fannie & Freddie taken into Conservatorships by the Federal Government in September 2008. A stock market crash commencing in 2007, bottoming in early 2009. The Fed responding to the crisis by dropping the Target Rate to zero in December 2008 until December 2016. The Fed deemed zero rates not enough easing. Thus they embarked upon QE 1,2 & 3, growing the Fed’s Balance Sheet five-fold. The stock market was a major beneficiary. In fact, if you bought the Dow and the S & P on 8/28/07, endured the crash through 2009, and sold yesterday, you would be up 56% and 60% respectively…not including dividends.
The current flattening of the yield curve doesn’t bode well for the economy. Certainly the bond market is not impressed and the Fed has not achieved their stated goal of 2% inflation. It doesn’t appear that the Target rate will be increased to 1.50% this year. At least the odds seem against it today.
10-Year – 2-Year T-Note Yield Spreads: 8/28/07 to 8/28/17
Treasury Yield Curves: 8/28/07 vs. 8/28/17
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
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