Global financial markets caught a glimpse of a world with 10yr yields above 3% in late 2018, and they didn’t like it. A combination of stock selling and Fed accommodation (a sequence of events, really) helped rates move swiftly back in the other direction in 2019. This move prompts a new question: are rates justified in going any lower if there’s a chance that the global economy isn’t circling the drain?
Such a question depends on exactly how good such chances are. Back in late March when we had surprisingly weak European economic data follow hard on the heels of the Fed’s surprisingly bond-friendly decision–one fueled by fears of a weakening global economy–chances were as high as they’ve recently been that some sort of drain was being circled. This logically coincided with the lowest yields in more than year.
Rates have obviously bounced back since then. A rebound in the economic data (despite various ups and downs) as well as the continued clearing of uncertainties (Brexit now extended and US/China trade deal making progress) make this a logical move as well.
The goal is now to determine whether it’s best to hang out closer to recent lows in the event that the global economy starts to slip by the end of the year or to gradually move higher on the chance that the economic expansion accelerates. There’s a lot of speculation as to just how possible or likely such an acceleration may be. Those looking at US data tend to make a better case for it. After all, a drop from 4%+ GDP to 2.2% isn’t the end of the world.
Those looking at European and Chinese economic slowdowns have an easier time making a case for caution and fear (good for bonds). EU GDP was 2.7% at the end of 2017 and 1.2% at the end of 2018. Forecasts call for it to drop just a bit more, depending upon whom you ask. Chinese GDP is high on an outright basis, but has steadily declined since 2010 from roughly 12% to 6.4% at the end of 2018 (matches the lows seen after the financial crisis).
This is some serious, big-picture uncertainty. US-based optimism won’t matter very much if Europe and/or China tank. As traders wait to see where these chips fall, we can follow along at home with technical levels. They jump right off the charts when they’re relevant. The current battleground is around 2.5-2.55% in 10yr yields. In other words, we’re currently watching the market make up its mind as to which way it will lean with respect to the large-scale questions about global growth. Every day that we’re under 2.55% (2.50%, better yet) is a good day.