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Digital Subscriptions > The Hedge Fund Journal > Issue 141 – Jun | Jul 2019 > Interpreting the US Bond Rally

Interpreting the US Bond Rally

June 2019

The US has had an extended and very impressive rally in the prices of US Treasury securities. The 10-year US Treasury has seen its yield move from a recent high of 3.23% in early October 2018, down to 2.22% at the end of May 2019. One of the most important questions is whether the Treasury rally is signalling that a US recession is imminent. While we see US real GDP decelerating into the second half of 2019, we do not yet see the US moving into an actual recession in the near future. If that read is correct, then what is driving the US bond market rally? Well, there are a variety of interpretations as to why this move occurred.

Let’s examine a multiplicity of forces impacting the market. (1) Subdued path of inflation. (2) Influence of Germany and Japan government bond yields. (3) Lose- Lose trade war yet lack of panic in US equities. (4) The unusually twisted shape of the US yield curve.

Subdued path of inflation

US inflation is subdued. Persistently subdued inflation works to lower inflation expectations as well as increasing the confidence that inflation risk will remain low for an extended period of time. What this means is that the spread between the US 10-Year Treasury yield and the historical core (excluding food and energy) inflation rate tends to narrow as more and more market participants accept the narrative that inflation will remain subdued for a long time.

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