BNY Mellon Global Markets – Weekly Market Commentary


We have slowly and quietly shifted back to the middle of the range in the treasury market after hitting YTD lows at the end of August. In contrast to the move to lower yields over the summer, which seemed to ignore the generally positive data that pervaded during this period, the recent move to higher rates flies against what could be considered dovish events and data points. In particular, the ECB moving down the road of eventual full out QE and the weaker than expected employment report could have easily been interpreted as catalysts for lower rates. Of course, rates in the U.S. and Europe hit YTD, if not all time lows in August and we simply could be in the midst of profit taking as well as a partial retracement of the fairly strong move experienced throughout the summer. As the chart below indicates, the longer end of the treasury curve remains well below where it started the year and has only retraced six percentage points since the lows in late August. In contrast, the story of the shorter end and belly of the curve are significantly different, with the yield on the two-year note almost 50% higher than where we started the year, while the five-year note is back to par after having rallied by over 10% during the spring. Since we have been in the higher rate camp throughout the summer, we view the recent move as an acknowledgement that the improving economy and low real rates of return are moving from unsustainable levels put in during the August rally.