Actually Easing
Financial conditions have actually eased since the Fed lifted rates in March, helping limit upward pressure on yields. Goldman Sachs economists say the looser conditions are a reason for the Fed to do more, and they expect policy makers to boost rates by a quarter-point three to four times annually through 2019.
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For many investors and analysts, the drop in yields this year comes back to the forces that have sustained the three-decade bond bull market time and again. With the Bank of Japan and European Central Bank still buying debt, U.S. yields are among the highest worldwide.
Couple that with an aging global population that craves fixed income, plus sovereign governments running up budget deficits, and it’s little surprise that growth -- and, by extension, bond yields -- have muddled along at such low levels.
“There’s a difference between good growth and good enough growth for the Fed to move,” said Joel Naroff, president of Naroff Economic Advisors. “I’m not backing off that the Fed is going to continue, yet I don’t necessarily think that rates are going to rise as much now as I thought going into the year.”
He cut his forecast in May for 10-year yields, to 2.8 percent at year-end from 3.2 percent.
Gradual Runoff
And then there’s the matter of the Fed’s $4.5 trillion balance sheet, amassed amid efforts to support the economy.
The gap between two- and 10-year yields narrowed after Wednesday’s release of minutes from the Fed’s latest meeting, which shed some light on plans to unwind the stash of debt.
The takeaway for investors: Officials discussed a system of rolling caps that will keep the drawdown gradual. The aim, according to the minutes, is to mitigate the fallout in financial markets and avoid roiling long-term rates.
“This portfolio unwind will very much be a slow, gradual and most importantly a methodical process,” wrote Walter Schmidt, senior vice president of structured products at FTN Financial.
This article was provided by Bloomberg News.