Treasuries “Untethering” From Drags on Yields

As discussed in a previous column, US economic growth and inflation data combined with record supply (due to record budget deficits and Fed balance sheet trimming) should push 10 year yields above 3.00%. However, treasuries were rallying and keeping yields relatively low due to trade war worries and US Treasury Bonds’ relative value compared to low yielding German bonds and ultra low yielding Japanese bonds. However, Monday’s news that the Bank of Japan is holding early discussions on changes to their rate targets and purchases sent leading government bond yields upward. The BOJ is the last of the world’s major central banks still implementing “full on” accommodative stimulus. So, markets are reacting to another “punchbowl being taken away” and need to prepare for that day (sometime soon?) when the world economy will be standing on its own (aka back to the “old normal”). The joint announcement between the US and the EU regarding a deal to work towards “zero” tariffs seems to remove another impediment to market confidence in future growth and inflation. Obviously if a similar announcement came from the US and China, markets would have less concerns about the future and bond yields could move quickly. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners