The decline in the yield of the 10-year Treasury could be looked at as an indication that the outlook for growth and inflation are falling. The cross-asset class indicators we track are not confirming this view, even at the recent lows.

The U.S. 10-year Treasury yield peaked on March 31st at 1.75% and has been steadily decreasing, with the pace accelerating in June.  The yield briefly dropped below an important trend level of 1.30%, then ended the week at 1.36%.    

Source: Koyfin.

This was being reported as a potential sign that the outlook for economic growth and inflation were slowing.  If this were the case, it would have negative ramification for assets that are positively correlated to economic growth and inflation like cyclical equities, high yield credit, and commodities.  It is a helpful exercise to look across various asset classes and indicators at times when one area is making a strong move to see if the other areas are confirming that move. 

One important indicator during this period has been high yield option adjusted spreads (OAS).  They have continued to decline since the 10-year yield peaked at the end of March and are near the lowest level since 2007. 

Source: Koyfin.

Source: Koyfin.

The U.S. dollar (DXY) is lower today than at the end of March and closed lower on the week, after the 10-year yield closed back above the 1.30% level. 

Source: Koyfin.

The DXY is well below the high reached back in March of 2020 and has been making a series of lower highs since that date.

Source: Koyfin.

The broad commodity index continued to increase after March 31st and ended last week near the highest level since the end of 2014.  

Source: Koyfin.

Source: Koyfin.

Oil volatility (a proxy for overall commodity volatility) ended the week lower than at the end of March, and below an important level of 40, where it has been for most of the last three months. 

Source: Koyfin.

Cyclical equities have lagged the overall S&P 500 since the end of March, but the worst performing industries have been the defensive Consumer Staples and Utilities. 

Source: Koyfin.

Equity volatility (VIX) has mostly been range bound in the teens since the end of March and most recently made another lower closing high below 20. 

Source: Koyfin.

Source: Koyfin.

The decline in 10-year Treasury yields has been unexpected based on the outlook we have for the economy.  However, if this decline were an indication of a broad-based decline in the outlook for growth and inflation, there should be confirmation from other asset classes.  This has not been the case the last few months, or even as the 10-year yield made a multi-month low last week. 

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.