Treasury yields have sunk as if a US recession is nearly here. The bundle of important economic reports coming this week could show those fears got overblown.
The yield on benchmark 10-year notes dropped to a 15-month low of 2.34 per cent on Thursday amid speculation growth is faltering enough to trigger a Federal Reserve interest-rate cut this year. But there’s been little tangible US data to justify that. Even the Fed, which got yields tumbling on March 20 by shocking investors with its more cautious stance toward the economy, didn’t actually predict gloom and doom.
Bond investors get some real information this week, though. The biggest event is Friday, with the March jobs report. There will also be insights into how much Americans are spending at retail stores as well as several readings on how much factories are being asked to produce. A handful of Fed officials are scheduled to speak, albeit nobody from the group that gets to vote on central-bank policy this year.
“The data is going to give us a view on where we really are on the economy, and if we should be as concerned about growth as we have been in the market,” said John Briggs, head of rates strategy for the Americas at NatWest Markets. Even a jobs figure that simply meets estimates “will be viewed as favourable,” he added. Yields will rise, Briggs predicted, if the reports are “pretty good.” He believes the 10-year note will end the year at about 2.5 per cent.
The 10-year Treasury yield stood at 2.41 per cent on Friday when trading closed for both the week and the first quarter. While that was above the nadir set Thursday, it was still far below the 2.61 per cent level from the day before the March 20 announcement that sent yields tumbling. The slide in the 10-year has also taken it below the rate on 3-month Treasury bills — a phenomenon known as an inverted yield curve that’s commonly viewed as a harbinger of recession.
Global issues will be on the bond market’s agenda this week, too. In addition to continued uncertainty over Britain’s exit from the European Union and Chinese Vice Premier Liu He’s planned trade talks in Washington, traders will also be eyeing factory indicators from Germany and China.
Prices for fed funds futures contracts show traders are betting the US central bank will cut its main interest rate by about a quarter point this year — suggesting worries the economy will worsen. That contrasts with what Fed officials anticipate. On March 20, the median projection of Federal Open Market Committee members was for the rate to remain steady throughout 2019.
This week’s US economic reports “are likely to indicate a soft patch in the first quarter, but no recession,” Bernd Weidensteiner, an economist at Commerzbank AG, wrote in a March 29 note.
Several Fed officials who spoke last week downplayed worries about the economy.
“The Treasury market is reflecting a slower-growth and lower-inflation environment,” said Michael Arone, chief investment strategist at State Street Global Advisors, which manages $2.8 trillion in assets. “The data will be key in terms of where we go from here. But the idea that the Fed is likely to cut rates by the end of the year seems a bit aggressive.”
Arone favours investing in shorter-maturity, investment-grade debt securities, given their yields are in line with those of longer-term bonds. He owns Treasuries with maturities ranging from 10 years to about 20 years, a hedge against his firm’s equity investments.