viernes, 6 de febrero de 2015

viernes, febrero 06, 2015
Why U.S. Bond Yields Are Falling

by: Andrew Sachais            

Feb. 1, 2015 11:34 PM ET
Summary
  • U.S. bond yields drastically fell alongside a weak U.S. economic growth print on Friday.
  • Meanwhile, market-based inflation readings are similarly declining.
  • With both inflation and economic growth below Fed targets, U.S. government and corporate yields may continue to decline in coming months.
U.S. government and corporate bond yields continue to decline as weak economic growth and inflation measures push out expectations for a Fed Funds rate hike. Since January 2014, iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) is up over 36%, while iShares Core Total US Bond Market ETF (NYSEARCA:AGG) rose nearly 7%, as is seen in the chart below.


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On Friday, the U.S. economic growth figure came in below estimates, possibly giving the Federal Reserve reason to hold off on rate hikes in early 2015. In the fourth quarter, U.S. economic growth came in at an annual pace of 2.5%, below the previous quarter's reading of 2.7%. Since 2010, the economic growth figure fluctuated between 2.5% to 3%, as is seen in the chart below. This is well below the average rate of over 4% during the 1990's and early 2000's.

As economic activity has been slowed by exports because of a strong dollar, consumer spending due to tepid wage growth, and weak business investment, economic growth has failed to achieve "escape velocity" higher.

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Data provided by the Federal Reserve

Meanwhile, as energy prices fell and wages remain suppressed, market-based inflation expectations have broadly declined. The chart below is of iShares Barclays TIPS Bond (NYSEARCA:TIP) over iShares Barclays 7-10 Year Treasury (NYSEARCA:IEF). This indicator represents inflation expectations of investors, moving higher when inflation expectations rise.

Since July, the indicator has fallen over 6% to levels not seen since the financial crisis, signaling demand for hedging against future inflation with TIPS is low. Until oil prices find a bottom, and real labor wages begin to significantly move higher, investors are unlikely to fear inflation.

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Data provided by Trading View

Lastly, with both inflation and economic growth readings below Fed policymakers' desired targets, the U.S. lending rate will likely remain at current levels. Since 2009, the Fed's benchmark lending rate has been at 0.25%, as is seen in the chart below. During the Fed's January meeting, policymakers stated they liked the positive momentum economic data, but remained "patient" on changing policy until more recovery was under way. Below is an excerpt from the Fed's press release:
"The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. 
Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2% over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely. 
Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated," according to Trading Economics.

With both inflation and economic activity improving, albeit at a slower than anticipated pace, the Fed remains "patient" in tightening policy, avoiding potentially pushing the economy into another recession. The weak growth figure on Friday, and the steady decline in energy prices, investors are pushing out the expected time table of an increase in the Fed's benchmark lending rate. With expectations being pushed out, investors continue to buy bonds, which should lead to even lower U.S. government and corporate yields in coming months.

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Data provided by Trading Economics

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