As we move into the 4th quarter of 2019, talk of negative interest rates continues. The recent U.S. Govern-ment’s auction of 30-year bonds on Thursday, October 10 drew a record low yield of 2.17% (source: Bloomberg 10/10/19). This is considered a strong sign of declining investor expectations for economic growth and inflation. The trend is global with the U.K. and Germany also posting record low yields for their respective 30-year bonds (source: Bloomberg 10/10/19).
Rising uncertainty and muted inflation “strengthens the case for a somewhat more accommodative stance of policy.” Officials “will act as appropriate to sustain the expansion” – Federal Reserve Chairman Jerome Powell as reported in The Wall Street Journal 7/16/19.
What a difference a year and even 6-months makes. For the past two years, Investors were fleeing the bond markets as forecasting rising Treasury Bond yields portended red ink. Just last October the 10-year Treasury Bond yielded 3.24% at its peak (source: Macrotrends 10-year Treasury historical chart 7/17/19).
The outlook for interest rates has steadily evolved over the first quarter. Now the Fed is unanimous in their outlook with all members voting to maintain the current level of interest rates (source: Federal Reserve board press release 3/20/19) . Furthermore, the minutes infer that the members have an aversion to increasing interest rates further, because of the increasing risks to the U.S. economy from slowing global growth and lower inflation, that surprised Fed officials.
“We’re in a place where we can be patient and flexible and wait and see what does evolve” Federal Reserve chairman, Powell 1/11/19 regarding future interest rate increases
These comments made by the Fed chairman exemplify the changed position of the Fed. Given the moderating growth of the global economy and some U.S. economic measures, the Fed is signaling that they can now be patient about further increases in interest rates.
Interest rates moved higher in the third quarter, and fixed income investors with long- term investment horizons might say, “It’s about time.” Why? (1) Bond interest delivers an important, ongoing income stream, (2) is important for wealth preservation, and (3) can be a significant element of fixed income returns.
The economy picked up momentum over the second quarter as the impact of the Trump tax cuts and regulatory relief took effect.
A changing sentiment is enveloping the bond markets, spooking investors. The 10- year Treasury began 2018 at 2.40%, below its 2017 March high of 2.63% (source: Bloomberg). This year its yield moved as high as 2.95% on 2/21/18, but finished the quarter at 2.74%.