The bond rally isn't quite done
The bond rally that resumed in mid-September is likely to continue a bit longer, abetted by signs of decelerating U.S. growth and a litany of geopolitical risks, from Brexit and Hong Kong protests overseas to the resumption of U.S.-China trade talks and the impeachment inquiry here at home. In addition, the mountain of negative-yielding bonds in Europe and Japan and the likelihood of further easing by the Fed should also contribute to some further increase in U.S. Treasury bond prices and decline in yields, even more so if the stock swoon at the start of October deepens.
All that said, there are offsets. Financial conditions remain supportive of growth and global central bank easings should cushion the blow of the global trade and growth deceleration. Such factors contribute to our base case view that the U.S. economy will continue to expand in coming quarters, albeit at modest rates. Moreover, both the U.S. and China could use some semblance of a trade deal, not only to nudge their slowing economies but also to offset all the negativity surrounding the impeachment process in the U.S. and the ongoing riots in Hong Kong.
Some in the market may suggest all of the challenges are priced into current low Treasury yields, and any improvement on the trade or geopolitical front will prompt a rebound in yields. That day may come, eventually. For now, Federated’s fixed-income duration committee believes the current environment supports some further increases in Treasury prices and a downward bias in market yields.