10-Yr-2-Yr Treasury Yield Spread Reverts to Positive
10-Yr-2-Yr Treasury Yield Spread Reverts to Positive
To be inverted…or not to be inverted. That is the question. Now what?
And, just like that, the bond market yield spread inversion that everyone was worrying about in mid-August has returned to a positive—if slight—slope, about two basis points, with the tens at 1.56% and the twos at 1.54%. In other words, the inversion inverted and all’s well. There, feel better now?
I’m being facetious, but there are times when I think it’s our job to point out that taking a step back from the screaming headlines is about the best first move in any investment approach. Moreover, as noted in these pages, was the fact that the negative yield spread seen briefly between the U.S. Treasury ten-year and the two-year notes has not been an effective recessionary signal.
Nor does the very latest U.S. data signal such. For example, according to the latest issue of the Fed’s Beige Book report, most U.S. businesses remain optimistic about their prospects despite concerns about tariffs and trade policy, as the economy continues to grow. Economic activity and employment appeared to grow at a modest pace in August and late July. Wages rose at a “modest to moderate” pace from the earlier part of the summer, and price increases were also modest.
And then Friday’s jobs data delivered exactly what the market ordered, jobs growth that was enough to indicate the economy is fine but not so much to suggest that the expansion is so fast that the Fed should keep interest rates steady in two weeks’ time when the FOMC meets. The U.S. economy added 130,000 payrolls in August, the Labor Department reported Friday. The unemployment rate was unchanged at 3.7% for the third consecutive month, remaining near its 50-year low. Pretty much a Goldilocks environment. Not too hot, nor too cold.
Does this sound like a pre-recessionary economy to you? Nevertheless, the Federal Reserve Board is expected—with over a 90% probability according to Fed funds futures markets—to once again reduce the Fed funds rate another 25 basis points to 1.75%-2.00%.
We heard the Fed’s code words this week: “To act as appropriate” to keep the economy moving forward. Seems upstanding, doesn’t it. These words are continually trotted out by a Fed official whenever she or he is asked a direct question about a rate cut. I think it really means the Fed will do whatever it takes to keep the stock market happy.
Admittedly there is some dissension inside the Fed, though ultimately it will probably lower some more. The futures market sees a further 25 bps reduction at the Oct. 30 meeting. Yields on the 10-year Treasury note stood at 2.02% after the Fed announced its rate cut on July 3, and 1.89% on the two-year note.
The 10-yr note yield ended Friday around 1.56% versus 1.50% the previous week.
Upcoming: 9/17-18 - FOMC meeting.
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