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Bonds Break Out
In November 2023, the Bloomberg Aggregate Index posted its strongest monthly total return since 1985. The 2-year Treasury yield ended the month at 4.70%, hitting its lowest level since mid-July. The 10-year Treasury yield ended the month at 4.34% after rising above 5.00% in October. A lower than-expected inflation print of 3.2% sparked a rally across Wall Street, with traders largely removing potential Federal Reserve rate hikes from their forecasts.
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Earnings Forecasts Down
More than 55% of S&P 500 companies reported third quarter earnings through October 31st, with the blended (actual plus estimates) earnings growth rate of 2.8% outpacing expectations for a decline of 0.3%. However, the magnitude of positive earnings surprises has so far run below five-year averages. Another trend in the third quarter is the slower blended year-over-year revenue growth rate of 2.1% compared to the 10-year average of 5.0%.
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Why are Treasury Yields Rising?
The 5-Year U.S. Treasury yield rose about 0.35% in September. Inflation expectations, as represented by the Break even yield, rose only 0.08%. The difference between these two measures is the Real yield on Treasury Inflation Protected Securities (TIPS). With inflation expectations gradually declining over the past year, there is another reason for the rise in Treasury yields.
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Higher For Longer
The yield on the 10-Year US Treasury rose in August to its highest level since 2007. The month saw real yields rise even more and are now at the highest level since 2009. Real, or inflation-adjusted, yields reflect the difference between the expected levels of inflation and nominal Treasury yields. Myriad factors impact nominal and real yields including supply and demand.
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Fed’s Last Hike?
The last week of July brought a mixed bag of economic data and comments from the Federal Reserve Chair. Inflation declined as measured by the Fed’s preferred measure of inflation, Personal Consumption Expenditures (PCE). The chart below shows PCE excluding food and energy, which declined for the month on a decrease in the price of goods.
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Stronger Data Help Lift Rates
Economic data was mostly stronger than expected in June. The Citi Economic Surprise Index, which measures the differences in actual and forecasted economic data, rose in June as data such as retail sales, consumer confidence and durable goods orders were all stronger than expected.
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Persistent Inflation
While CPI and Core CPI have steadily declined over the past year, wage growth has remained elevated. Following a November 2022 speech by Federal Reserve Chair Powell, many economists and market participants have focused on the impact of wages on non-housing services inflation.
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Fed Nearing End of Hikes
The “dot plots” released by the Fed in March depicted their plans to hike rates one more time this year and then hold rates steady. The Fed has also stated they remain data dependent and thus Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, is an important data point.
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Like a Lion
The rates market roared in March as Treasury yields rose and fell sharply in response to economic data and market developments. The 2-year Treasury yield began the month near 4.8%, climbed to over 5% and dipped below 4% during the month.
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Treasury Curve Further Inverts
The Treasury curve inverted more deeply in February as 2-year Treasury yields rose 61 basis points. The increase was caused by expectations for additional rate hikes due to stronger inflation and employment reports during the month.