Weekly Market Digest: What’s Going On With Treasury Yields?

The market does not like uncertainty – and this was heard loud and clear this week!

The week got off to a rocky start with new tariff threats flying back and forth between the U.S. and China. That was accompanied by weaker economic data out of China and Germany, fueling the fire on global growth concerns and continued political unrest in Hong Kong.

U.S. stocks had their worst day of the year Wednesday dropping 3% in front of a backdrop of plunging bond yields. This sparked a media frenzy of looming recession calls citing the yield curve inversion. Things settled down Thursday after an inflow of solid U.S. economic data, and equities enjoyed a nice bounce Friday to finish a volatile week of trading.

Weekly Returns

S&P 500: 2889 (-1.03%)
FTSE All-World ex-US (VEU): (-1.13%)
US 10 Year Treasury Yield: 1.55 (-0.24)
Gold: $1,514 (+1.15%)
EUR/USD: 1.1090 (-.98%)

Major Events

  • Monday – Massive protests in Hong Kong caused a shutdown at their international airport.
  • Monday – The Argentinian Peso plunged to an all-time low against the U.S. dollar over the prospect of a populist, left-leaning government taking over and increasing the chance of default.
  • Tuesday – President Trump added concessions to his announcement Monday of 10% tariffs on $300B of Chinese imports by saying some items would be excluded until December.
  • Wednesday – Yields plummeted, and the 10-year treasury briefly dropped below the 2-year, causing the yield curve to invert.
  • Thursday – General Electric Stock dropped over 11% after a prominent whistle blower accused GE of accounting fraud, despite the questionable motives of the accuser. The stock recovered Friday with the backing of Wall Street analysts and a $2 million share purchase of stock by the CEO.
  • Friday – Stocks rebounded on stimulus bets following weak economic data out of Germany.

What’s Up With the Treasury Yield?

The reality is that there has been a paradigm shift to a low interest rate environment that has largely been driven by accommodative global monetary policy. The U.S. economy continues to chug along at a moderate pace of growth, despite warnings signs flashing of slowing global growth abroad. This is reflected by interest rate differentials where the U.S. still offers higher yields compared to the rest of the world, where yields are lower and even negative. Still, yields have continued to fall ever further.

Earlier this week, the 30-year treasury yield fell below 2% to an all-time low before rebounding Friday. Central banks have been signaling further easing is on the way in the face of growing uncertainty. The Fed signaled more rate cuts to come, the ECB plans to restart quantitative easing (programed government bond purchases), and stimulus measures were recently announced out of Germany and China.

This has created a very confusing landscape for investors to say the least. Investors are being pushed into riskier assets and are being compensated less for safer haven assets like bonds. In this environment, assessing asset valuations becomes more challenging. The risk reward dynamic remains present, but uncertainty is rising. We see higher likelihood for a pick-up in volatility in either direction for risky assets.

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