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.