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We have entered an unprecedented investment yield environment, resulting from high levels of uncertainty and growing negative yielding debt abroad.
Going forward the bar will be high for central bankers as they weigh policy decisions tied to an uncertain outlook. In the event central banks fail to deliver the stimulus the market is expecting, we could see some modest upward pressure on yields. On the other hand, if the economy deteriorates further, central banks may be forced to act more swiftly which could send yields to depths we have yet to see.
The 10-year Treasury yield declined by 50 basis points during the month of August as escalating trade tensions stoked recession fears into the bond market.
Falling below 1.50%, the 10-year Treasury yield was at the lowest level since 2016 and the 30-year Treasury yield dropped below 2.00% for the first time in history! Market participants continued to be unimpressed with the progress, or lack thereof, on trade discussions between the U.S. and China. That being said, we have yet to see any material effects on the economy as consumer spending continues to underpin the U.S. economy for now.
We suspect many of our readers are wondering what is going on with interest rates in the U.S. as the relentless drop in rates appears to have no end in sight. The reality is there has been a perfect storm brewing in the U.S. rates market. Fears of slowing growth, increased trade tensions, negative yields abroad, muted inflation, and central banks easing monetary policies have all led to a flight to quality in Treasuries that has driven yields to impressively low levels. Furthermore, the MOVE Index, which tracks bond market volatility, has risen to its highest level since 2016. Nonetheless, the race to the bottom has even drawn investors attention to the notion of potential negative rates in the U.S.
Rising trade tensions and associated market jitters have led bond investors to price in more aggressive central bank easing from the Fed.
Yet, the release of the minutes from the July FOMC meeting and the commentary from the Jackson Hole meeting, where a host of Fed members opined on the current state of monetary policy, portrayed a more divided committee on future path of policy rates. While reaching a consensus for a “mid-cycle” adjustment in monetary policy in July, a couple of Fed members were in favor of a 50 basis point rate cut, while several other members lobbied for no change in current policy rates. Fed Chairman Powell indicated the Fed, “will act as appropriate to sustain the expansion.” However, with so much uncertainty surrounding the downside risks the committee ultimately preferred not establishing monetary policy on a preset course. On balance, we do expect further rate cuts from the Fed, however the path of rate cuts may not be as aggressive as investors originally thought.
The views expressed above reflect the views of Allianz Investment Management LLC, as of 09/2019. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.