Better Days Ahead for Bonds

One of our biggest challenges in 2019 was explaining the bond market’s baffling signals. Many firms— including ours—kicked off 2019 with expectations of rising rates after the Federal Reserve’s (Fed) December 2018 rate hike.

Then, the macroeconomic environment made a turn. Trade tensions between the United States and China intensified, and global economic data deteriorated. Global fixed income investors turned to U.S. Treasuries for income, safety, and liquidity, adding more pressure on yields. The 10-year U.S. Treasury yield fell to a three-year low of 1.46% on September 4, and the Treasury yield curve inverted (long-term yields falling below short-term yields)

[Figure 1]

. As this happened, we emphasized in our communications that the bond market was becoming disconnected from U.S. economic fundamentals. Thankfully, the Fed eased tensions with three straight rate cuts from July to October. Policymakers’ actions seem to have renewed investors’ confidence.

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