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With expectations of slowing global growth and U.S. markets pricing in an interest rate cut in 2019, U.S. Treasury yields hit their lowest levels in over a year last week.

Bespoke Investment Group reported,

“As far as US equities are concerned, every major index, style, and sector ETF is down this week (w/o 5/21/19) and this month except for Utilities (XLU) and Health Care (XLV). … MTD, China has been the worst performer while the 20+ year treasury ETF (TLT) has been the best performer. You know it’s a tough month for equities when a Treasury ETF is the best performer. … “Across the curve, we saw numerous examples of US Treasury yields falling to their lowest levels in well over a year. The chart below [Figure 1] shows the yields of the 2-year, 10-year, and 30-year treasury since the start of 2016. … In the case of the 2-year yield it traded down as low as 0.69% on Thursday for its lowest level since February 2018, while the 10 and 30-year maturities both traded down to yields not seen since Q4 2017.”
FIGURE 1: U.S. TREASURY YIELDS (2016–2019)

Source: Bespoke Investment Group

Analysts cite concerns about global growth as a key reason for falling yields both in the U.S. and abroad, in addition to expectations for the Federal Reserve to make at least one interest rate cut in 2019. Figure 2 outlines various scenarios for rate expectations as indicated by the futures market, showing just over an 85% probability for at least one 25-basis-point rate cut and no expectations for a rate hike.

FIGURE 2: FUTURES MARKET EXPECTATIONS FOR FED FUND RATE THROUGH JAN. 2020

Source: Bespoke Investment Group

According to Bespoke, “The futures market isn’t just pricing in one rate cut either. As shown in the chart below [Figure 3], there is a 30% probability of a 50 bps cut in the Fed Funds rate and another 15% probability of 75 bps or more!”
FIGURE 3: FUTURES MARKET PRICING FOR FED FUNDS RATE THROUGH JAN. 2020

Source: Bespoke Investment Group

Supporting the thesis of a slowdown in global growth, last week saw some serious deterioration in the U.S. manufacturing situation.

IHS Markit’s topline analysis on the flash U.S. PMI noted,

“May PMI data revealed a further slowdown in U.S. private sector output growth in May, as a struggling manufacturing economy was accompanied by a notable downshift in gear in the service sector. “At 50.9 in May, down from 53.0 in April, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index indicated the slowest expansion in overall business activity since May 2016. The composite index is based on original survey data from IHS Markit’s PMI surveys of both services and manufacturing. The muted rise in output was attributed to softer demand conditions and subdued growth of new orders. The rise in new business in May was the softest recorded since the series began in October 2009.”
FIGURE 4: IHS MARKIT COMPOSITE PMI AND U.S. GDP

Sources: IHS Markit, U.S. Bureau of Economic Analysis.

The slowdown in the U.S. manufacturing data from Markit, while concerning, shows nowhere near as steep or long a decline as the trend in manufacturing data out of the eurozone.

IHS Markit reported last week,

“Manufacturing once again reported the tougher conditions, with output down for a fourth straight month and new orders falling for an eighth month, led by a further steep drop in goods exports. However, rates of decline of output, new orders and exports all eased for a second successive month. The service sector continued to grow, but the rate of expansion was the weakest since January amid sluggish growth of new work. With the exception of the soft patch seen at the turn of the year, new business inflows were the lowest since 2014.”

FIGURE 5: IHS MARKIT EUROZONE PMI AND GDP

Sources: IHS Markit, Eurostat

Bloomberg cited the continued decline in European bond yields on Monday (May 27), noting,

“Stalled talks in the U.S.-China trade war and escalating tensions have soured sentiment for risk assets. That’s driven sovereign bonds higher and pushed global stocks toward their first monthly decline of 2019. … Britain’s 10-year yield declined two basis points to 0.956%, the lowest in more than 23 months. Germany’s 10-year yield was unchanged at -0.12%, the lowest in more than two years.”

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