By Tom Burnett CFA
In mid-day trading on August 1, 2022, the government bond market has rallied sharply bringing down interest rates in the Ten-year and 30-year segments (data supplied by WSJ.com). The yield on the Ten-year Treasury is now 2.61%, down from 2.93% last week. Similarly, the yield on the 30-year bond is now 2.93%, down from over 3.00% last week. Each yield path has seen a strong increase from the year-end 2021, with new highs of 3.4% for the 10-year bond and 3.45% for the 30-year issue. But the recent patterns have reversed that upward movement and the yields on both segments are now much lower than the June-July high levels. These yield reductions are somewhat surprising in view of the Federal Reserve’s stated public policies meant to raise short-term rates. The Fed is clearly on a path to raise the Fed Funds rate beyond its current rate of 2.25%-2.50%. The next Fed meeting is set for September 20-21 when most observers expect an increase of 50 or 75 basis points. That action would take the Fed Funds rate above the current yields for the 10-year and the 30-year issues. The current bond market appears to be forecasting an economic slowdown that will greatly reduce the demand for credit and reinforce the trend to lower long-term rates.
Investors need to watch these trends closely since interest rate levels often predict expected economic activity and any slowdown in economic growth could exert a negative influence on corporate profits. Stock market performance is often ruled by the underlying profitability of publicly traded companies and right now, the bond market is predicting an overall slowdown in economic growth.
Tom Burnett CFA is Director of Research