Treasuries, Short Term and Long Term Trends Differ, Yield Curve Flattening Further (for now)

Treasury yields are being buffeted by many factors. The 10 year yield has dropped in the past few days (now 2.79%, under the recent trading range) on geopolitical concerns (possible US strike in Syria, USA/Russia tensions). Other factors indicate longer term increases in treasuries: possible easing of trade tensions between US and China, CPI report indicating an inflation spike, new US budget projections indicating regular trillion dollar deficits, etc. The 2 year Treasury jumped to 2.31%, combined with the lower 10 year yield, we are seeing the flattest yield curve in 10 years. The expectation is for the long end to rise. Today’s Fed Minutes showed officials seeing improving economic growth and higher inflation. A major shift in tone is coming as members are considering changing the description of monetary policy from “accommodative” (it’s been accommodative for a decade!) to “neural” or “restraining”. Note that the Fed’s own projections indicate a future short term rate above the so-called “neutral rate” (the neutral rate is the rate that is neither accommodative or restraining). So they actually foresee a day when Fed policy will be needed to rein in growth. Two more rate hikes are anticipated this year (June and September), with the “wild card” of a potential fourth increase this year possibly in December, futures markets indicate a 25% chance of that. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners