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Trade Tensions, Bond Yields, and the U.S. Economy

Jul 16, 2018



With rising trade tensions, and the benign past inflation report, investors should pay close attention to U.S. government bond yields this week.  U.S. 10-year treasury yields posted their fifth consecutive weekly decline to start the week with investor bets against the U.S. 10-year hitting a record high. This reality could lead to increased volatility, and even a reversal of the downward sloping yield curve.

Another factor to take in to consideration is the shape of the yield curve.  While the U.S 10-year yield has been steadily inching lower for over a month now, the yield on the 2-year note has been increasing along with monetary policy expectations.  The difference between these long and short-term yields, becoming smaller and smaller, is evidence of the yield curve flattening.

Most see a flattening yield curve as a negative economic indicator, but it’s not the only thing investors use to gauge the market.  Not many people see a recession in the near future, and the record bets against the 10-year illustrate this consensus. Investors must take into consideration the current upward momentum of the U.S. economy. 2Q earnings reports could prove to be a further boost to positive investor sentiment toward the economic environment in the U.S. 

Corporate earnings will be closely followed this week with key names like Goldman Sachs and Morgan Stanley reporting.  Investors should pay close attention to Goldman’s earnings release as their trading profits are more dependent on fixed-income than other banks like JPMorgan Chase, who recently beat earnings riding atop of increased trading.


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