On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Consulting Director Sophie Antal Gilbert discussed the recent rise in the 10-year U.S. Treasury yield, first-quarter earnings season results, and the outcomes of recent central bank meetings in Europe and Japan.
Two possible factors behind the surge in 10-year U.S. Treasury yield
The 10-year U.S. Treasury yield touched 3% the week of April 23—for the first time since 2014, Eitelman noted. In his viewpoint, this was largely driven by two factors, one of which is the current rally in commodity prices, “The increase in the cost of commodities has started to stoke some fears of inflationary pressures building in the U.S. again—and that’s a headwind for the bond market,†Eitelman said, noting that the price of U.S. West Texas Intermediate crude oil shot up to roughly $68 a barrel on April 26.
The second factor, in Eitelman’s mind, is increased confidence among fixed-income investors that the U.S. Federal Reserve (the Fed) will deliver on its rate hike guidance for the year. “The bond market has re-priced its Fed interest rate outlook to roughly 3.5 increases this year, which is a significant shift,†he explained.
Eitelman noted that while the rise in the 10-year yield to 3% is an important milestone, he and the team of Russell Investments strategists view it as likely being the peak for interest rates going forward. With an eye toward the slope of the U.S. Treasury yield curve, he noted that the 2-year Treasury yield has been increasing as well, which has allowed for the spread between 10-year and 2-year yields to narrow to just 48 basis points. “This is close to the flattest the yield curve has been during this market cycle,†Eitelman said—“and if we continue to see the slope of the curve flatten, it’s not unreasonable to think it could potentially invert in late 2018 or 2019.†If that does happen, he added, it would be an important early warning sign that the current economic expansion could be nearing the end.
