The 10-year yield has broken back below a key level
Four months ago during the first week of February, we asked the question here whether or not the 2.5-year uptrend of the 10-year Treasury yield from its all-time low in July 2016 marked the end of its multi-decade downtrend, or if it was merely a blip on the way to lower rates.
Since then, as of the writing of this post (market close on June 3, 2019), the yield on the 10-year Treasury has declined approximately 60 basis points, breaking back below the orange trend line tracing its historical peaks.
The decline has pushed the yield lower than the Fed funds target rate (2.50%, which is also the interest rate on excess reserves) by the widest margin (43 bps) since January 2008.
It is an odd thing to consider that banks holding the $1.4 trillion of excess reserves at the Fed earn more on this overnight rate than they can on today’s 10-yr or even 20-yr Treasury yields.
Related to this inversion, the futures market for Fed funds now indicates an implied probability of 98% that the Fed will cut its target rate by the end of 2019. But even with a cut of 25 basis points, the target rate would still be above today’s 10-yr yield.
Against the backdrop of an economy growing at 3%, an unemployment rate of 3.6% and solid corporate earnings growth, these falling yields and the strangely-shaped yield curve might at first glance seem to run counter to expectations.
Unless of course, rather than reflecting what is currently happening, these yields are projecting what is to come. If that is the case and the bond market is right, the end of the cycle appears to be nearing and a slowdown lies ahead.
Unless otherwise noted, data is sourced from Bloomberg.
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