Drop in US Long-Term Treasury Yields, Surge in Short-Term Treasury Yields

The yield on the US 2-year Treasury rose almost 18 basis points for the week to 4.73% reinforcing the yield curve inversion as the yield on the 30-year Treasury was down 8 basis points to 4.31% and that on the 10-year Treasury was almost flat. Some market players suggest the recent and furious plunge in yields on Fed cut bets has been too much too fast. It’s worth noting that the 30-year Treasury yield shed a hefty 80 basis points since mid-October. That said, this stellar performance should not obscure the fact that US longer-term government bonds are still in loss since the beginning of the year and have not erased the huge double-digit losses recorded over the past four years. In January 2020, the yield on the 30-year Treasury had fallen below 1.3%.

The evolution of government bond yields will depend on inflation (November CPI released on December 12th) as well as the Federal Reserve's balance sheet reduction policy. In this regard, it should be noted that the central bank continued to reduce the size of its balance sheet by almost $59 billion over the first week of December. It shrank it by $814 billion since the beginning of the year, from $8,551 billion to $7,737 billion as of December 6th. This move could have a recessionary effect, especially at a time when the economy is slowing down.

It's a bit of the same story we're experiencing in Europe though the eurozone economy has already significantly slowed down and inflation has fallen lower than expected, to 2.4% in November compared with 2.9% in October. The 10-year German bund yield was down 8 basis points week-over-week to 2.28% from 2.36%. Same move for the yield on the French 10-year OAT closing at 2.83% vs 2.92% a week ago.

Overall, the rally in the riskiest bond segments showed no signs of abating this week.

The IBOXX € Liquid Corporates gained 0.70%. In the U.S., the IBOXX $ Domestic Corporates index was up 0.53%. High yield bonds notched a seventh positive week in a row in Europe, with a gain of 0.59% (IBOXX € Liquid High Yield Index) while their American peers treaded water, up 0.02% (Markit iBoxx USD Liquid High Yield Capped Index). Lastly, emerging debt in local currencies was up 0.08% though the greenback gained some momentum (dollar index close to the 104 mark, up 0.7% over the week).

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