Inverted Yield Curve Puts Rates On Hold

  April 26, 2019

The yield on the 10-year treasury fell to 2.41% at the end of March, down from its peak yield of 3.25% in October 2018. The Fed’s shift from a tightening mode to a hold mode is interpreted by some economists and analysts as a lack of confidence in economic growth.

Treasury yields inverted further as the 6-month treasury note yielded more than the 7-year treasury bond in March. Inverted yields mean that shorter term rates are higher than longer term rates, translated by markets as minimal economic expansion and inflation expectations.

A sustained inversion becomes more concerning should it linger for several quarters. Some are even expecting a rate cut later in the year, if not in 2020, should economic data shed dismal projections.

Negative yields on some European government bonds reflect minimal growth expectations with subdued inflation throughout the EU. An inverted yield curve in the U.S. may partially be the result of slowing economic expectations in Europe and internationally.

The yield curve has been fairly flat over the past few months, meaning that the yield on shorter term bonds have been similar to the yield on longer term bonds. This dynamic created some uncertainty for the Fed, making it difficult to determine whether to raise rates or keep them the same.

Many believe that a divergence between stock prices and bond yields has evolved, where bond prices have risen concurrently with stock prices. Stocks historically head lower when bonds prices head higher, in anticipation of slowing economic activity or lingering uncertainty.

Sources: Eurostat, Treasury Dept., Federal Reserve

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