Ben Mohr, CFA
Director of Fixed Income
The 10-year Treasury yield broke through a key threshold yesterday closing at 0.77%, its highest in eight weeks, and ending at the same 0.77% that it closed at on April 8th. As shown in this week’s chart, the yield curve has been steepening substantially since March 9th, when the 10-year closed at its all-time low of 0.54%. This steepening may be a sign from the bond markets that the worst might be behind us.
On the economic front, Automatic Data Processing released data yesterday that showed the private sector lost only 2.76 million jobs in May, far below the 8.75 million forecasted by economists, and also far below the 19.56 million private sector jobs that were lost in April. This welcome news was amplified by National Institute for Allergy and Infectious Diseases Director Dr. Anthony Fauci’s remark that Moderna’s COVID-19 vaccine candidate is likely on-track to start Phase III human trials in July. Additionally, he noted that the plan is to begin manufacturing doses of the vaccine in tandem with the trials so that potentially 100 million doses are available to be shipped by November or December. Collectively, these favorable developments sent the S&P 500 up 1.36% and the 10-year Treasury yield from 0.68% to 0.77% yesterday, steepening the yield curve. As such, the fixed income and equity markets are finally exhibiting normal correlations, as a steepening curve with a rallying stock market signifies investors selling down long-dated Treasury bonds to buy stocks. This is in contrast with the March cash dash that sent rates down while the curve steepened all the while the stock markets fell as investors sold off both stocks and bonds to raise cash.
Also shown in our chart are the projected Treasury yield curves for the end of this year and the next two years based on the Treasury forwards market. They show the yield curve continuing to rise and steepen, with the 10-year forecasted to rise to 0.85% at the end of this year, 1.02% at the end of next year, and 1.18% at the end of 2022. While Treasury forwards will continue to fluctuate and the 10-year cannot be expected to reach these projected yields exactly, the expected steepening shows that the bond markets are expressing some level of optimism for the future given these recent positive developments. Ultimately, we see these developments as a positive sign that the economy, markets, and pandemic are progressing towards recovery.
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