/perspectives/sector-views/rates-anticipate-further-yield-curve-flattening
Rates: Anticipate Further Yield Curve Flattening
Economic conditions, goosed by tax reform, call for a faster pace of Fed rate hikes.
The Treasury yield curve continued to flatten in the fourth quarter, a trend that was in place for the majority of the year. The front end of the Treasury curve underperformed, with two-year notes increasing 40 basis points in yield as the Fed delivered another 25 basis-point increase in the federal funds rate at its December FOMC meeting. At the same time, inflation remained moderate, and robust demand for long-duration assets caused the long end of the Treasury curve to outperform, with the 30-year Treasury bond yield falling 12 basis points. The 2s/30s yield curve flattened by over 100 basis points over the year, with the two-year note yield increasing from 1.19 percent to 1.89 percent, and the 30-year bond yield decreasing from 3.07 percent to 2.74 percent.
We See Four Fed Rate Hikes in 2018 in Response to Accelerating Growth and Inflation
The fiscal easing in the pipeline will boost real GDP growth, which leads core inflation by six quarters. In turn, the Fed will look to get ahead of a possible overheating of the economy by raising rates four times in 2018, rather than the three hikes they projected as of December.
Source: Bloomberg, Barclays, Guggenheim Investments. Data as of 12.31.2017.
The flattening of the Treasury curve during the quarter delivered mixed returns for the overall Treasury market. The Bloomberg Barclays U.S. Treasury index returned 0.05 percent for the quarter, bringing the total return for the year to 2.30 percent. The Bloomberg Barclays U.S. Treasury 20+ year index returned 2.55 percent for the quarter, delivering a total return of 9.00 percent for the year. The Barclays U.S. Agency index returned 0.06 percent for the quarter and 3.0 percent for the year. Globally, the Bloomberg Barclays Global Treasury index returned 1.10 percent for the quarter and 7.30 percent for the year.
Looking ahead, we expect the Fed to increase the fed funds rate by another 25 basis points at its March meeting. With the new tax law now taking effect, economic growth is likely to remain strong this year and cause the labor market to overheat, which should prompt the Fed to tighten at a faster pace. We expect the Fed to deliver four interest-rate hikes in 2018. Providing additional pressure on the Treasury market is the looming increase in supply. The recently released Treasury refunding schedule indicates that the marginal increase in Treasury issuance needed to fund a larger budget deficit and the runoff of the Fed’s portfolio will be tilted toward shorter coupon maturities as well as bills. Four rate hikes in 2018, combined with the expected tenor mix and amount of Treasury issuance, should disproportionately pressure front-end yields that should support further bear flattening of the yield curve. A more hawkish Fed could cause realized and implied interest rate volatility to rise from current low levels, which could result in attractive investment opportunities if it leads to a widening of high-quality Agency spreads.
2018 Treasury Issuance Will Be Concentrated in the Front End
The U.S. Treasury Department’s recent refunding announcement reflects an increase in the government’s borrowing needs. The outcome will be increased issuance for every maturity, with extra emphasis on the two- and three-year tenors, as well as bills. The looming Treasury supply and tenor mix, combined with our expectation for four Fed rate hikes in 2018, will likely result in disproportionate pressure on front-end yields that should support further bear flattening of the yield curve.
Source: Bank of America Merrill Lynch, J.P. Morgan, Guggenheim Investments. Data as of 2.1.2018.
—Connie Fischer, Senior Managing Director; Kris Dorr, Managing Director; Tad Nygren, CFA, Managing Director
Important Notices and Disclosures
Note: “Rates” products refer to Treasury securities and Agency debt securities.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2018, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
FEATURED PERSPECTIVES
October 27, 2020
Guggenheim’s 2020 Election Portfolios
Our portfolios are constructed based on the key aspects of each candidate’s policy agenda that we believe will move markets. We will publish daily updates in the run up to the presidential election on Nov. 3, 2020.
October 22, 2020
In the Eye of the Storm
The relative calm we feel in the markets right now isn’t the end of the storm, it is just the eye.
VIDEO
Brian Smedley, Head of Macroeconomic and Investment Research, and Portfolio Manager Steve Brown share their outlook for the third quarter 2020.
Brian Smedley, Head of Macroeconomic and Investment Research, discusses major trends likely to shape markets this year.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 06.30.2020 and includes leverage of $13bn.
Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. Only a Guggenheim Credit Income Fund 2019 (GCIF 2019) prospectus makes such an offer. This material is authorized only when it is accompanied or preceded by a GCIF 2019 prospectus. Neither the SEC nor the Attorney General of the State of New York nor any other state regulator has passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense. Securities are offered through Guggenheim Funds Distributors, LLC, member of FINRA/SIPC, as Dealer Manager.
©
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”