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Fixed Income Market Update

Authors: Jerusan Jegatheeswaran Co-VP Research, Dragos Cada Co-VP Research, Alice Li Research Analyst, Amy Li Research Analyst, Helen Feng Research Analyst

Treasury Yield Movements: U.S. and Eurozone

Introduction to Treasury Yields

Treasury yield is the interest rate that the U.S. government pays to borrow money for different lengths of time. These debt instruments, called treasury bonds and treasury notes, are seen as risk-free investments fully backed by the U.S. government. The 10-year treasury yield is often a measure of investor sentiment. The higher the investor confidence in market growth, the less treasuries they buy, so the lower the prices of treasuries, leading to a higher yield. In general, yields are higher for longer term securities due to investors’ demand for premiums to compensate for a longer exposure to risk.

U.S. Treasury Yields Over the Past Week

The U.S. Treasuries market has been volatile this week, due to a mix of bullish and bearish sentiments from the possible avoidance of another government shutdown, trade optimism, as well as weak retail sales data.

Avoidance of Another Government Shutdown

On Monday, U.S. lawmakers secured a tentative deal on boarder security funding, meaning another government shutdown would be averted, boosting market sentiment. In reaction, the yield on the benchmark 10-year Treasury Note moved higher to around 2.679 percent. The yield on the 30-year Treasury Bond was also higher at 3.0159 percent. The economic loss was measured at $6 billion from the last government shutdown that ended on January 22. Federal government workers were furloughed, small business couldn’t get loans, and private companies couldn’t go public.

Trade Optimism

Yields increased further as investors grew more optimistic about trade talks between China and U.S.. Leaders from the world’s two largest economies were scheduled to meet on Thursday and Friday in an attempt to strike a deal. President Trump indicated on Tuesday that he is willing to push back the March 1 deadline for reaching a trade agreement with China if the two sides were close to a deal. The yield on 10-year Treasury Note rose to around 2.708 percent and the yield on the 30-year Treasury bond rose to 3.036 percent on Wednesday morning.

Weak Retail Sales Data

U.S. Treasury yields reversed their upward trend on Thursday after disappointing retail sales data was released. Retail sales fell 1.2 percent in December, marking their biggest monthly drop since September 2009. Investors once again worried about the slower economic growth. 10-year Treasury note yield fell to 2.64 percent at the end of the day.

U.S. 10-Year Treasury Yield Over the Past 10 Days

Source: Market Watch

Eurozone Debt Market

Development after E.U. Cut GDP Forecast on Feb 7th

On Feb.7, the European Commission sharply cut its forecast for Eurozone GDP growth this year to 1.3% from 1.9% and for next year to 1.6% from 1.7%. The growth cut, considered as confirmation of economic slowdown in euro zone, highly bruised investors’ confidence and led them into the safer debt market. Most high-rated Eurobonds’ yields were down by 3-6 basis points (bps).

German bond (also called bund) yields sank to their lowest level in two years, taking a step closer to zero percent. Germany’s 10-year bond yield, regarded as the benchmark for the bloc, dropped more than 5 bps to 0.105 percent, its lowest level since November 2016.

Meanwhile, Italian bonds tumbled. The 10-year Italian bond yield climbed to 2.954 percent, its highest since early January. The inverse movement was due to the rising risks of a wider budget deficit. “The same amount of fiscal stimulus would cause the deficit to widen much more since GDP growth is falling low,” said Rishi Mishra, interest rates strategist at Futures First Info Services.

Germany 10-year Government Bond Yield

Source: MarketWatch

Recent Development

Eurozone government bond yields moved higher earlier this week following the upward trend of US Treasury yields. However, the yields fell sharply on Thursday, Febuary 14 after weak US retail sales data and German GDP data showing zero growth in the fourth quarter of 2018. The latest European data shows a just 0.2% quarter-on-quarter growth of euro zone economy and that Germany narrowly avoided recession in the final quarter of 2018. German 10-year government bond yields fell to a low of 0.086 percent, close to its lowest point in two and a half years, reflecting deep concerns about the European economy.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.