The 10-year Treasury yield has been flirting with dipping below 2% throughout the later half of June and into the start of July. As our LPL Chart of the Day, Will Trade Truce Help 2% 10-Year Treasury Yield Hold?, shows, the yield has not ended the day below 2% since November 2016, and it reached its cycle low of 1.37% almost exactly three years ago on July 8, 2016.
With the yield sitting so close to 2%, it could easily break below that level simply from day-to-day ups and downs, but we believe that both economic fundamentals and recent catalysts could start pushing yields higher. Continued support from fiscal stimulus, recent progress on trade, and a Federal Reserve that has put rate hikes on pause—and may even provide a rate cut as insurance against trade uncertainty—all point to a more resilient economy than is currently priced into bond markets.
Inflation expectations, which also impact Treasury yields, have been reined in as well as the economic growth outlook has been downgraded. But while structural forces, such as technology, demographics, and a strong dollar, may continue to keep inflation contained, some pressure from wages and current tariffs is likely to reassert itself.
“U.S. Treasuries remain attractive to foreign investors, putting downward pressure on yields,” noted LPL Chief Investment Strategist John Lynch, “but what markets are currently pricing into Treasury yields doesn’t match the economic fundamentals, in our view. Progress on trade is key, but we believe the economic outlook supports the 10-year Treasury yield reaching the 2.5–2.75% range in the next 6 to 12 months.*”
The next jobs report, to be released Friday, July 5, will give us our next read on the job market and wages. The Bloomberg-surveyed economists’ consensus has job growth rebounding from a slowdown in May and average hourly earnings accelerating slightly from 3.1% to 3.2% year over year. If actual numbers are in line with consensus estimates, on top of recent progress on trade coming out of the G20 Summit, we believe yields could begin to move higher.
* Additional descriptions and disclosures are available in the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets publication.
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This Research material was prepared by LPL Financial, LLC.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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