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Chart of the week

Strong economic growth or low rates? Both can’t be right.

Treasury rates remain notably disconnected from economic growth expectations. Our chart looks at the divide, why portfolio flexibility remains key.

September 10, 2021 | 2 minute read

10-year Treasury yield minus economic growth expectations

Source: FS Investments, Bloomberg, and Federal Reserve Bank of Philadelphia, as of August 31, 2021. Economic growth expectations refers to the 1-year forward forecast of real GDP growth.

  • Markets retreated this week as investors began to focus on several potential speedbumps ahead, including the Delta variant’s impact on global growth, rising inflationary pressures as well as the timing of the Fed’s pending tapering announcement.
  • Placing the week’s setback in context, however, U.S. stocks have still seen seven consecutive months of positive returns through August 31 as markets have been propelled by accommodative monetary policy, plentiful fiscal stimulus and continued economic optimism.1
  • To this end, however, the chart highlights a significant disconnect between economic expectations and Treasury rates. Investors continue to anticipate strong economic growth (nearly 5%) through the coming year.2 Yet, the 10-year Treasury yield, whose movements are often seen as a proxy for economic growth expectations, sits at just 1.3% and is down approximately 42 basis points from its peak in late March.2
  • The rate-growth disconnect was more extreme earlier in the pandemic but remains stark today. It is an important relationship to focus on simply because both indicators can’t be right—strong economic growth is typically accompanied by a rising rate environment and vice versa.
  • The ultimate outcome of the debate will have significant impacts on market leadership as we’ve already seen growth and value trade places amid shifting rate environments several times this year. Against this backdrop, investors may benefit in adopting a dynamic, style-agnostic approach as markets mind a wide gap. 

  • Based on the S&P 500.

  • FS Investments, Bloomberg, and Federal Reserve Bank of Philadelphia, as of August 31, 2021.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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