The 10-year Treasury yield had been trading within a historically tight range of just under 0.1% since late October (the tightest trading range of that length since 1974, as outlined in our recent Bond Market Perspectives, “Nothing Ado About Much”). But that all changed on December 19 as a confluence of events—some international and some domestic—helped move rates higher globally.
Recent comments from several European Central Bank members indicated that a shift away from quantitative easing as the primary driver of monetary policy and toward interest-rate driven policy is under consideration, which helped drive rates higher. Meanwhile, an announcement from the German government that it intends to sell more long-term debt also contributed. Rates moved higher still on Wednesday as both houses of Congress passed the tax reform bill, which helped lead the 10-year Treasury yield to 2.5%, its highest close since mid-March 2017.
The selloff in sovereign bonds (and resulting higher yields) appeared to be taking a break as we wrote this blog; however the key takeaway is that foreign rates continue to impact U.S rates (as outlined in our Outlook 2018 publication). As we move toward an environment where global central banks may start to dial back monetary accommodation, overseas rates could move higher over the course of 2018, which would also lessen their drag on U.S. rates. This factor, along with the potential for moderate U.S. gross domestic product growth and rising inflation , lead us to believe that rates could move moderately higher over the course of 2018, with the 10-year Treasury potentially ending the year in the 2.75% to 3.25% range.
Past performance is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted.
International and emerging markets investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
International debt securities involve special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
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