July 16th Headlines

Treasury prices are modestly lower following a quiet overnight session (Japanese markets closed for holiday). Chinese economic data was mixed, with Q2 GDP in line with expectations and June industrial production weaker. In the U.S., the June retail sales report included upward revisions to the May data of 30-50 bps, but the June control group figure was flat versus expectations of a 0.4% gain. The control group is the metric used in the GDP calculation. The rest of the week will be relatively quiet from a data perspective, but the markets will be paying close attention to Fed Chair Powell’s semi-annual Congressional testimony, beginning with the Senate Banking Committee tomorrow morning.

The slope of the yield curve continues to be a popular topic of discussion in the markets, with the 2-year/10-year spread now at just 24 bps. An inverted yield curve has preceded each of the last 5 recessions, but the timing has varied from 10-22 months between the inversion date and the beginning of the recession. For example, the curve last inverted in 2006, but the economy continued to expand for another 22 months. Additionally, the 1994-95 Fed tightening cycle is the only one in modern history to not result in an inverted curve, although it got very close (2yr/10yr spread of 7 bps in late 1994). Some would argue that the current flattening has been exacerbated by central bank purchases of long-term bonds. These purchases have been made independent of any value metrics, and term premiums for 10-year Treasuries have actually been negative in recent years. As the Fed reduces its bond portfolio, term premiums should theoretically expand, which could relieve some of the downward pressure on long-end yields.

Jason Haley
Managing Director, Investment Management Group