US Treasury 10-year yields have fallen below 2.24% and are at their lowest in 20 months; 30-year yields at below 2.68% are just a couple of basis points from surpassing lows of 2017 to mark 30-month lows. More notably, the Fed term premium (vs 10-year) at -0.79 is now at the lowest since data started in 1961, and in the US dollar swaps curve the 50-year yields are around 19 basis points lower than the 3-month yields (2.34% vs 2.53%).
Of course, Treasury yields are still nowhere as low as mid-2016 levels when the 10-year hit 1.35% and the 30-year at 2.09%. For now it seems concerns over global growth, undershooting inflation and protracted trade concerns are putting 2% and 2.5% respectively in the sights of many market commentators in the near-term. US equities have been down five of the last seven trading days and look set for another fall later today following the red across Asian and European markets this morning.
At least the US held back in labelling China a currency manipulator yesterday, in their semi-annual report on trading partners’ macro and FX policies. But the details speak another story. The report as a whole demonstrates a furthering of a protectionist stance from the US as they increase the number of countries they evaluate, from 12 previously, to the 20 countries where bilateral trade surpasses $40bn per annum, whilst tightening the definition of a “material current account surplus” from 3% to just 2%. Any of the countries that breach this or the other thresholds (including “persistent” and “one-sided” currency manipulation that extend beyond 6-months or 2% of GDP) now face the threat of new tariffs from the US Department of Commerce.
Although our base case does not expect safe asset yields to fall to mid-2016 levels, the current environment reflects many of the same global growth and trade concerns with the addition that we are 30 months further ahead in the business cycle. Neither do we anticipate longer-dated Treasury yields to bounce back significantly from present levels any time soon given there are little to no signs of any of the three major economic headwinds relenting near-term.