The third quarter was another volatile one for credit markets, with yields across the maturity spectrum falling as markets continue to price in a slowing economic environment. On the short end of the curve, the Federal Reserve cut interest rates twice this quarter, bringing the Fed Funds target range to 1.75-2.00%. The cut in July was the first interest rate cut by the Fed since the Financial Crisis in 2008. The benchmark 10-year Treasury which started the quarter at 2.01%, finished the quarter yielding 1.68%.
On August 1st, President Trump announced he would impose 10% tariffs on $300 billion in Chinese goods later this year that were not already subject to tariffs. This caused equity markets to plummet and bond prices to soar. That escalation, together with reports of weaker activity in Germany, China and other countries dependent on trade, set off a series of volatile moves in bond markets. Yields on the 30-year Treasury bond fell briefly below 2% in early August for the first time ever.
At the same time, the Treasury yield curve briefly inverted – something many investors had feared. As of the time of this writing, the yield curve is not inverted, with the spread between the 2-year and 10-year Treasuries at a positive 9 basis points (.09%). This is an indicator we are watching closely, in addition to other leading economic indicators, in order to judge just how much the economy is likely to slow. We currently believe the global market slowdown is likely to bottom in the December 2019-February 2020 timeframe, followed by a pick-up in growth as 2020 unfolds. This assumes no further escalation in the trade war.
In the meantime, we continue to position client portfolios with individual municipal bonds in the 4 to 7-year maturity range and a “barbell” approach in corporate bonds with very short maturities coupled with bonds in the 6 to 8-year maturity range.
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