“US bond markets have seen some aggressive moves in recent days, with 10y yields falling 20bp over the past week to the lowest level since September 2017,” notes ABN AMRO senior economist Bill Diviney.
Key quotes
“The renewed downshift in yields started in early May following the unexpected re-escalation of the trade war, and has intensified over the past week as investors see little sign of any near-term resolution to the dispute.”
“As a base case, we see some kind of truce announced at the G20 summit on 28-29 June, delaying further tariff implementation while talks continue between the US and China to forge a deal, although our conviction level on this is low. In the meantime, downward pressure on yields is likely to persist. The breakdown of the fall in yields suggests increased Fed rate cut expectations have been the primary driver, with safe haven demand likely explaining the remainder of the move.”
“Rate cut expectations to end-2019 have moved from 15bp of cuts priced on 3 May to 36bp priced as of today (a 21bp move); over the same timeframe, the 10y yield has fallen 30bp while the 2y yield has fallen 26bp. We continue to think Fed rate cuts are unlikely on our forecast horizon to end-2020, meaning much of this move could unwind if a truce is announced. However, should the currently threatened tariffs be implemented more quickly (as soon as the end of June), the risk then is of a further escalation, eg. a raising of tariff rates, which would then pose significant risks to the growth outlook – and in turn, potentially prompt a Fed rate cut.”
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