Chart of the week

As long rates fall, core fixed income stuck in the middle

Long rates have declined despite rising inflation readings. This week’s chart looks at the declining yield curve and why core FI is in a tough spot.

June 11, 2021 | 2 minute read

U.S. Treasury yield curve, then and now

Source: U.S. Treasury Department, as of June 10, 2021.

  • Credit and equity markets have been very calm since the beginning of May. At the same time, however, both have moved slightly in perhaps unanticipated directions. Against this backdrop, short-term inflation expectations have jumped this year based on both consumer surveys and market-based measures of inflation.
  • While expectations for Q2 corporate earnings have seen their highest upward revisions in decades, the S&P 500 has remained rangebound, continuing to hover around the 4,200 mark. Meanwhile, recent inflation data have notched their biggest jump in years – including this week’s CPI data. Yet the 10-year Treasury yield has quietly edged lower throughout Q2.
  • Given recent activity across both markets, it seems plausible that equity investors, constantly forward-looking, may have already priced in much of this year’s positive economic and earnings news. On the other hand, fixed income investors appear to be treating recent price increases largely as transient as the pandemic recedes and the economy re-opens.
  • The chart shows activity in the U.S. Treasury yield since the start of Q2. As it highlights, short term rates over which the Fed has the most influence remain anchored near zero.1 Longer-term rates, however, have seen increasing declines as you go further out the yield curve.1
  • Though mild compared to last year, the decline in long-term rates is important because core fixed income currently appears to be stuck in the middle. It still provides paltry levels of income, only slightly higher than the rock-bottom levels of 2020. But it also offers investors minimal potential for price appreciation as rates remain relatively close to their historic lows.

  • U.S. Treasury Department, as of June 10, 2021.

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