Treasury yields dipped lower Monday morning, with the 10-year yield falling to around 2.1 percent, its lowest level in nearly two years. The 30-year yield also dropped to 2.55 percent on fears that the trade war is taking its toll on the U.S. economy.
The spread between the 10-year and 2-year yield continues to hover at around 0.2 percent, near its lowest levels of the past decade. An inversion of this yield curve preceded each of the last nine U.S. recessions.
The latest weakness in the U.S. bond market come after a series of disappointing global economic numbers suggest the U.S. trade wars with China, Mexico and other countries is starting to impact companies’ bottom lines. The ISM Manufacturing Index fell to 52.1 in May, missing consensus economist estimates of 53. The ISM number was also the lowest U.S. number since October 2016.
Growth Forecasts Plummeting
Last month, U.S. President Donald Trump raised tariffs on $200 billion in imported Chinese goods from 10 percent to 25 percent.
The Atlanta Fed’s GDPnow tracker is currently forecasting 1.2 percent U.S. GDP growth in the second quarter, down from 3.2 percent in the first quarter. In April, the IMF cut its full-year global growth forecast from 3.5 percent to 3.3 percent and its U.S. growth forecast from 2.5 percent to 2.3 percent. The U.S. Federal Reserve and the European Central Bank also cut their respective growth forecasts in April.
The deteriorating global economy has prompted several prominent economists to speculate that the Federal reserve will issue at least one interest rate cut by the end of 2019. Last week, economists from Barclays and JPMorgan said it’s becoming increasingly likely the Fed will cut rates this year.
JPMorgan also cut its year-end target for the 10-year Treasury yield from 2.45 percent to 1.75 percent.
“Trade related headwinds to the growth outlook have continued to build, and our economists believe that the latest developments this week are likely to have lasting damaging effects on business confidence and should thus prompt the Fed to respond,” said JPMorgan analyst Jay Barry.
Bond Market Reacts
According to the CME Group FedWatch tool, the bond market is pricing in an 96.4-percent chance of at least one rate cut in 2019. Just one month ago, the FedWatch tool indicated a just a 47.3 percent chance of a rate cut in 2019.
The FedWatch tool is based on the pricing of 30-day Federal Funds Futures, which incorporate market expectations of average daily Federal Funds Effective Rate levels during futures contract months.
As treasury yields fall, bond prices rise. After a slow start to the year, the iShares Barclays 20+ Yr Treas.Bond (NASDAQ: TLT) is up 6.7 percent in the past month, while the SPDR S&P 500 ETF Trust (NYSE: SPY) is down 5.1 percent in that time.
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