U.S. long-dated bonds remain stuck as yields are being weighed down by ongoing uncertainties which include slowing global growth, trade tensions, ballooning debt in China, and Italian political turmoil. Furthermore, uncertainty as it relates to Trump tariff policies and other important trade agreements such as the World Trade Organization has benefited the bond market with respect to lower interest rates. Juxtaposed to the aforementioned, interest rate probably won’t go much lower as inflation is nearing the Fed’s target rate, U.S. corporations are doing well overall, unemployment is at generational lows, and general business sentiment is upbeat. Core PCE, the Fed’s favorite gauge of inflation, touched 2%, a healthy number by Fed’s measurement, and is a sign that the economy is in a sweet spot.
Separately, the yield curve continues to flatten which is a concern and may be forecasting slower growth or some other type of economic/geopolitical issue. Banks dislike a flattening yield curve as it compresses interest rates margin and reduces their income. Borrowers dislike a flattening yield curve because it reduces optionality on loan programs.
With the 10-year Treasury note near 2.84%, we think it’s wise to lock in interest rates as there are many reasons for rates to go higher and far fewer reasons that would move interest rates lower.